UNIVERSITY  of  CALIFORNIA 

AT 

LOS  ANGELES 

LIBRARY 


MUNICIPAL    BOiNDS 


Municipal  Bonds 

A  STATEMENT  OF  THE  PRINCIPLES  OF  LAW  AND  CUSTOM  GOV- 
ERNING THE  ISSUE  OF  AMERICAN  MUNICIPAL  BONDS  WITH 
ILLUSTRATIONS     FROM     THE     STATUTES     OF     VARIOUS     STATES 


By 
FRASER  BROWN 

MEMBER  OF  THE  NEW  YORK  CITY  BAR,  LECTURER  ON  FINANCE 

IN  THE    SCHOOL    OF    COMMERCE,     ACCOUNTS    AND 

FINANCE,    NEW    YORK    UNIVERSITY 


New  York 
PRENTICE-HALL,  Inc. 

1922 


J.  ft  t?  1  4  \) 


V        Gcrf'.oW  19 


Copyright,  1922,  by 

PRENTICE-HALL,   Inc. 

Printed  in  the  United  States  of  America 


All  riff  his  reserved 


:Bg/ 


To 

FREDERICK  PRIME  DELAFIELD,  Esq. 

of  the  New  York  City  Bar 


la  FOREWORD  AND  ACKNOWLEDGMENT 

*'•'  The  necessity  for  a  book  of  this  character  became  apparent 

during  the  preparation  of  k  course  of  lectures  on  municipal 
bonds  recently  delivered  at  the  School  of  Commerce,  Accounts 
and  Finance  of  New  York  University.  An  examination  of 
existing  literature  revealed  a  lack  of  any  comprehensive  treat- 
ment of  the  subject,  and  suggested  the  present  volume.  The 
author  sincerely  hopes  that  the  result  of  his  effort  will  be 
valuable  and  of  interest,  not  only  to  students  of  municipal 
finance,  but  to  municipal-bond  houses,  public  officials  respon- 

**    sible  for  bond  issues,  and  the  general  investor. 

'^  The  literature  on  the  subject  of  municipal  bonds  begins 

^^^^with  the  late  Judge  Dillon's  masterly  treatise  on  the  law  of 
municipal  corporations.  There  is,  however,  an  hiatus  be- 
tween the  "Law  of  Municipal  Corporations"  and  articles  in 

%ix   various  textbooks  covering  the  general  field  of  investments, 

**>    and  casual  articles  by  investment  bankers. 

The  general  principles  of  municipal-bond  law  can  be  stated 
for  the  student  and  the  "bond  man."  The  adoption  of  the 
Uniform  Negotiable  Instruments  Law  by  all  the  States   (ex- 

V    cept  one)  has  inevitably  tended  to  produce  more  or  less  uni- 
.    form  decisions  on  mooted  points.     While  there  are  curious 

*^  decisions  in  many  jurisdictions,  it  is  probably  true  that  these 
I  \  decisions  are  the  result  of  hard  facts,  which  are  said  to  make 
bad  law.  Generally  speaking,  fundamental  canons  have  been 
worked  out  and  further  judicial  decisions  must  tend  more  and 
more  toward  recognition  of  established  rules.  The  work  of 
the  legal  specialist  is  statutory  construction. 

An  attempt  is  made  in  the  following  pages  to  treat  the 
fundamental  principles  of  the  subject  clearly  and  concisely, 
leaving  to  the  specialist  the  application  of  such  principles  and 
the  consideration  of  the  law  of  the  jurisdiction  applying  to 
particular  issues  of  securities. 

If  much  of  the  material  is  quoted  or  taken  from  the  "Law 
of  Municipal  Corporations,"  it  is  because  that  treatise  has  done 

vii 


vlii      FOREWORD  AND  ACKNOWLEDGMENT 

for  the  law  of  municipal  corporations  what  Bishop  did  for 
the  law  of  domestic  relations,  and  what  Whigmore  has  done 
for  the  law  of  evidence.  Numerous  citations  and  direct  and 
indirect  quotations  from  "Ruling  Case  Law"  seem  justified 
because  it  is  unnecessary  to  re-state  principles  of  law  which 
have  been  adequately  stated  in  that  digest. 

Acknowledgment  is  due  to  my  associate,  Lewis  L.  Dela- 
field,  Jr.,  Esq.,  for  kindly  criticism  and  advice,  and  to  other 
associates,  who  have  verified  citations  and  read  the  proofs  of 
this  book.  Acknowledgment  is  not  complete  without  an 
expression  of  great  appreciation  of  the  counsel,  encourage- 
ment and  example  of  the  associate  to  whom  this  book  is 
dedicated. 

Fraser  Brown. 


CONTENTS 


I — The  Problem  Stated 

The  municipal  bond;  creature  of  law;  general  principles 
must  be  studied;  the  municipality  existed  before  the  na- 
tion; municipal  needs  create  municipal  debt;  necessity  for 
borrowing  money;  annual  taxation  inadequate;  procedure 
of  bond  issue  outlined;  tax  ordinance;  budget;  bond  ordi- 
nance. 

II — The  Municipal  Bond 


The  municipal  bond  is  a  negotiable  instrument;  attri- 
butes of  negotiability;  conditions  of  negotiability;  compo- 
nent parts  of  a  municipal  bond  described;  coupons;  reg- 
istration. 

Ill — Municipal  Corporations 18 

Defined;  are  creatures  of  the  State;  created  by  special 
charter  or  pursuant  to  general  laws;  powers;  expressed  or 
implied;   governmental  or  proprietary;   classification. 

IV — Municipal  Property  and  Improvements  .      .       24 

History  of  human  race  is  the  history  of  cities;  increase 
of  public  activities;  municipal  expenditures;  running  ex- 
penses; debt  service;  property  and  improvements;  capacity 
to  hold  and  acquire  property;  power  to  make  public  im- 
provements; improvements  outside  of  municipality;  public 
utilities;  sale  of  commodities;  construction  of  houses. 

V — ^Taxation  and  Limitation  of  Taxes      ...       32 

Tax  defined ;  power  to  tax  inherent  in  the  State ;  exer- 
cised by  legislature;  delegated  to  municipalities  and  local 
taxing  boards;  classification  of  taxes;  capitation  or  poll; 
property  taxes;  assessments;  excise  and  income  taxes; 
taxation  for  debt  service;  its  importance;  limitations  on  tax 
rates;  arguments  against  tax  limits;  especially  for  debt 
service. 

VI — Municipal  Borrowing 42 

Power  to  incur  indebtedness;  nature  and  scope;  does 
not  include  the  power  to  issue  negotiable  securities;  limita- 
tions on  the  power;  constitutional;  statutory;  illustrations; 
power  to  issue  negotiable  instruments;  nature  of  power; 
statutory  illustrations;  refunding;  ratification;  short  term 
loans. 


CONTENTS 


VII — The  Promissor  in  the  Bond 61 

The  sovereign  or  state;  cannot  be  sued  without  its  con- 
sent; the  county;  duplication  of  taxation  by  subdivisions; 
debt  of  subdivisions;  contingent  liability;  the  municipality; 
implied  power  to  borrow;  express  power  to  issue  bonds; 
quasi-raunicipalities  defined  and  classified. 

VIII — The  Promise  and  Purpose  of  the  Bond  .      .       66 

The  promise  of  the  bond  is  not  shown  on  its  face; 
limited  by  constitutional  or  statutory  tax  rates  which  re- 
sult in  limited  obligations;  limitations  may  be  to  special 
fund;  hence  bonds  not  negotiable  instruments;  limitations 
by  reason  of  area  of  land  taxed;  the  purpose  of  the  bond; 
bond  issued  for  self-sustaining  public  utilities;  bonds  issued 
for   non-revenue-producing  improvements. 

IX — The  Maturity  of  the  Bond 73 

Bonds  classified  as  to  time  of  payment;  term  bonds  due 
and  payable  at  one  time;  callable;  debt  service  sinking 
fund;  disadvantage  of  sinking  funds;  serial  bonds  pay- 
able in  annual  installments;  equal  installments;  substan- 
tially equal  installments;  deferred  installments;  debt  serv- 
ice for  serial  bonds;  no  sinking  fund  required;  term  may 
be  limited  to  life  of  improvement;  reason  for  such  limi- 
tations. 

X — Sale  and  Award 85 

Private  sale  of  bonds;  advantages  to  municipality;  to 
brokers;  disadvantages  to  municipality;  to  brokers;  public 
sale;  advantages  and  disadvantages;  illustrative  statutory 
provisions;  par  sale;  economic  fallacy  and  political  neces- 
sity; evasion  of  par-sales  requirements;  brokerage  and 
commissions;  form  of  notices  of  sale  and  propositions 
responsive  thereto. 

XI — Default  and  Remedy  of  the  Bondholder     .       96 

Default  defined;  consequences  and  prevalence  of  de- 
fault; reasons  for  default  are  inability  to  pay,  or  bad 
faith;  remedy  of  the  bondholder;  judgment  for  amount 
due;  mandamus  to  levy  taxes;  position  of  the  courts;  ac- 
tions based  on  contract;  legislative  relief;  good  faith  of 
issuing  municipality. 

XII — Bonds  as  Investments 105 

Elements  of  an  ideal  investment  for  individuals;  security 
of  principal;  fixed  or  definite  interest;  fair  income  return; 
merchantability;  collateral  for  loans;  freedom  from  tax- 
ation; freedom  from  care;  satisfactory  maturity;  conve- 
nient denomination;  possibility  of  depreciation;  invest- 
ments by  executors,  trustees,  and  savings  banks;  regulated 
by  statutes;  illustrations;  postal  savings  deposits. 

XIII — Taxation  of  Bonds 118 

General  considerations;  the  taxing  power  de/ined ;  of  the 
United  States;  of  the  States;  taxation  of  the  principal  of 


CONTENTS  xi 

CHAPTER  PAGE 

bonds;  by  the  United  States;  by  the  States;  taxation  of  the 
income  of  bonds;  nature  of  the  tax;  by  the  United  States;  by 
the  States;  bonds  owned  by  non-residents;   inheritance  tax. 

XIV — Valuation  of  Bonds 128 

Money  is  a  commodity;  its  price  is  interest;  normal  and 
net  yield  from  bonds;  tables  of  bond  values;  basis;  fluc- 
tuations and  differences  in  yield;  purchasing  power  of 
money;  market  conditions;  differences  in  value  exist  be- 
tween the  bonds  of  different  issuing  units;  bonds  of  same 
class  are  not  equally  valuable;  factors  are  valuation  of 
taxable  property;  indebtedness;  tax  rates;  population; 
municipal  credit;  the  practice  of  valuation  described;  dif- 
ference of  opinion;  source  of  information. 

XV — Incontestability  and  Validation       .      .      .     145 

The  menace  of  default;  improvements  in  standard  of 
honesty  and  legislation;  estoppel  by  recital;  effect;  short 
statutes  of  limitations;  illustrated;  validation  of  decree  of 
administrative  department;  by  order  of  court;  doctrine  of 
res  adjudicata;  constitutional  difficulties;  registration  by 
officials;  certification  of  signatures  and  seal. 

XVI — Particular  Bonds 155 

Bonds  of  cities;  counties;  minor  municipalities;  tax  dis- 
tricts; bonds  issued  for  income-producing  public  utilities; 
for  other  properties  or  improvements;  bonds  payable  from 
direct  general  taxes;  from  assessments;   electoral  bonds. 

XVII — The  Attorneys'  Functions 161 

Difficulties  usually  arise  before  issue;  the  attorneys' 
functions;  when  retained  by  the  municipality;  the  advan- 
tages of  such  procedure;  when  retained  by  the  purchaser; 
the  disadvantages  of  such  procedure;  the  record  of  pro- 
ceedings; the  purpose  of  the  record;  and  its  contents;  the 
opinion  of  counsel ;  preliminary  and  final ;  the  meaning  of 
the  opinion;  qualified  opinions;  merchantability  of  opinions. 

XVIII — Practical  Suggestions 180 

Publicity  of  bond  sales;  by  advertising;  list  of  periodi- 
cals; circulars;  preparation  and  certification  of  bonds;  side 
agreements  with  dealers;  place  of  payment  of  principal 
and  interest;  promptness  in  payment;  employment  of 
counsel. 

Appendix  A 187 

Outline   analysis  of  subject. 

Appendix  B 197 

The  Municipal  Finance  Act  of  North  Carolina. 

Appendix  C 215 

Definitions  of  terms  used  in  investment  banking. 

Bibliography  ,         .         .    •     .         .         .         ,         ,         .         223 

Index 225 


liSlDS 

.2  S 

S>:5::  which 
_~"C.cidents  to 
y"a  he  origin  of 


bond   is    a 
to   the 
law 
origin  of  a 
,^^:e  statute.     Its 
§.a.  all   statutory, 
c^'he  promissory 
so  much 


V) 


■^  ®  oends 


O  |c5  differ  greatly 

2^  ■ 

«^§* 
«^' 

Qj'l^ipal  bond,  a 
K  V.  nciples  is  nec- 
^fc-municipal  cor- 


be,  a  certain 
such  statutes 
General  prin- 
and  decisions 


it  raises  its 


■S  §•  no  intelligent 
"fe*  ;s  bonds  worth 

ft,  'S 

^«, 

^'^'i   the   political 

§•§;  and   develop- 

'3.2  "ly   concerned. 

I  future.     We 

^^  municipality) 

^^lory  that  was 

the  glory  of 


000  oils.: 

IZ6I  AON 


'  oooo»_™*rLa^l.    ,  1  ooooiis:^,*ja^C!„. 


ooSg$   "osiinH  l°3'"jl'3''     io1i9gS!'"°°§j'"lijj!^j.'!'';°»j 


TEMPORARY  NEWARK  TURNPIKE  IMPROVEMENT  BOND 

CdOUntg  of  i!|ubH0t1*  a  body  pottHc  and  corporate  of  the  State  of  New  Jersey 
hereby  acknowledges  itself  indebted  for  value  received  and  promises  to  pay  to  the  bearer  or  if 
this  bond  be  registered,  to  the  registered  holder  hereof,  on  the  first  day  of  May,  1924,  the  sum  of 

7t,  payable  on  the  first 


of  the  United  States  of  America  of  or  equal  to  the  present  standard  of  weight  and  fineness  at  the 
office  of  the  County  Collector  of  Hudson  County,  Jersey  City,  New  Jersey. 

This  bond  may  be  registered  as  to  principal  by  the  holder  in  his  name  on  the  books  of  the 
County  kept  in  the  office  of  the  County  Collector,  and  such  registration  shall  be  noted  on  the 
back  of  this  Iwnd,  offer  which  no  valid  transfer  of  this  bond  shall  be  made  except  on  said  books 
unm  after  registered  transier  to  hearer.  Such  regisiranon  shall  not  affect  the  negotiahmty  or 
the  coupons  which  shall  continue  to  pass  by  delivery.    At  the  request  of  the  holder,  this  bond 


registered  holder. 

This  bond  is  issued  for  the  purpose  of  temporarily  financing  Three  hundred  and  fifty  thousand 
dollars  ( $350,000.)  of  the  cost  of  the  Newark  Turnpike  Improvement,  which  purpose 
has  not  yet  been  carried  out,  by  virtue  of  a  resolution  of  the  Board  of  Chosen  Freeholders  of  tbt 
County  of  Hudson,  adopted  on  the  eighth  day  of  May,  1919,  and  In  pursuance  of  an  Act  of  the 
Legislature  of  the  State  of  New  Jersey,  entitled:  "An  Act  to  authorize  and  regulate  the  issuance 
of  bonds  and  other  obligations,  and  the  incurring  of  indebtedness,  by  county,  city,  borough 
village,  town,  township,  or  any  municipality  governed  by  an  Improvement  commission, "  approved 
March22. 1916,  constituting  Chapter252  of  the  Lows  of  1916,  as  amended. 

It  is  hereby  certified  and  recited  that  all  the  conditions,  acts  and 
things  required  by  the  Constitution  and  Statutes  of  the  State  of  Neu 
Jersey  to  exist,  to  have  happened  and  to  have  been  performed  prece- 
dent to  and  in  the  issuance  of  this  bond  exist,  have  happened  and  have 


and  other  limit  prescribed  by  the  Constitution  and  Laws  of  said  State 

IN  WITNESS  WHEREOF.  County  of  Hudson  has  caused  this  bond 
to  be  signed  by  the  Director  of  the  Board  of  Chosen  Freeholders  of  satd 
County  and  by  the  County  Collector  under  the  seal  of  the  Board 
attested  by  the  Clerk  of  said  Board,  and  the  coupons  attached  hereto 
to  be  authenticated  by  the  facsimile  signature  of  said  County  Collector 
and  this  bond  to  be  dated  the  first  day  of  May,  1919 


n 


iffif — 


MUNICIPAL  BONDS 

Chapter  I 
THE  PROBLEM  STATED 

Origin  of  municipal  bond. — The  municipal  bond  is  a 
creature  of  law.  There  is  no  other  security  which  to  the 
same  extent  as  the  municipal  bond  owes  its  incidents  to  law 
and  not  only  to  law  but  to  statutory  law.  The  origin  of  a 
municipal  bond  is  a  statute,  or  more  than  one  statute.  Its 
terms,  its  effect,  its  means  of  payment,  are  all  statutory. 
There  is  no  other  written  instrument,  except  the  promissory 
note  and  the  last  will  and  testament,  which  depends  so  much 
for  its  vitality  upon  statute  law. 

While  statutes  governing  the  issue  of  bonds  differ  greatly 
among  themselves,  there  is,  and  always  must  be,  a  certain 
similarity  and  agreement  in  principles,  because  such  statutes 
aim  to  produce  substantially  the  same  result.  General  prin- 
ciples can  be  deduced  from  a  study  of  statutes  and  decisions 
of  the  courts,  construing  fiscal  legislation. 

To  form  any  right  judgment  on  a  municipal  bond,  a 
knowledge  or  at  least  an  understanciing  of  principles  is  nec- 
essary. Unless  we  clearly  understand  what  a  municipal  cor- 
poration is,  what  its  financial  powers  are,  how  it  raises  its 
money,  and  how  it  pays  its  debts,  we  can  have  no  intelligent 
appreciation  of  the  circumstances  which  make  its  bonds  worth 
much  or  little. 

Early  importance  of  municipality. — With  the  political 
history,  even  with  the  history  of  the  growth  and  develop- 
ment of  municipalities,  we  are  not  particularly  concerned. 
Our  interest  is  with  the  present  and  immediate  future.  We 
may,  however,  note  in  passing  that  the  city  (the  municipality) 
is  older  than  the  state  or  the  nation.  The  glory  that  was 
Greece  and  the  grandeur  that  was  Rome,  was  the  glory  of 

1 


2  MUNICIPAL  BONDS 

Athens  and  the  grandeur  of  the  Eternal  City,  not  of  well- 
defined  nations  with  clearly  limited  frontiers.  Paris  was  a 
great  lady  before  modern  or  even  medieval  France  arose  to 
do  her  homage.  London  lay  before  the  spires  of  Westmin- 
ster before  the  Welsh  marches  or  the  Scottish  border  knew 
the  King's  peace.  New  York,  Boston  and  Philadelphia  were 
relatively  metropolitan  before  thirteen  sovereign  and  inde- 
pendent commonwealths  gathered  to  form  the  United  States. 

As  man  emerged  from  the  savage  state,  his  relative  weak- 
ness and  lack  of  natural  offensive  members  developed  the 
need  of  mutual  aid  and  protection.  Groups  of  families 
formed  villages  in  the  remote  past  as  today.  The  close  asso- 
ciation of  human  beings  with  fixed  habitations  and  common 
necessities  developed  needs  which  could  and  can  be  met  only 
by  co-operation.  A  large  and  dense  collection  of  human 
beings  occupying  a  limited  area  have  needs  peculiar  to  them- 
selves, which  create  the  necessity  for  municipal  or  local  gov- 
ernment and  regulation,  and  thus  in  its  turn  the  necessity  for 
corporate  organization. 

What  those  needs  are  we  know  in  a  general  way,  but  we 
must  give  them  passing  consideration.  How  those  needs  are 
met  it  will  be  our  secondary  purpose  to  ascertain.  The  result 
of  such  needs  expressed  in  terms  of  today  is  municipal  debt. 
The  evidences  of  such  debt  are  the  subject  of  our  inquiry. 

Origin  of  bond  issue. — A  bond  issue  has  its  origin  in  the 
necessity  for  borrowing  money.  When  a  municipal  corpora- 
tion decides  to  undertake  a  public  improvement  such  as  the 
construction  of  a  water  supply  system,  it  borrows  the  money 
to  pay  the  cost.  It  borrows  because  the  cost  is  usually  too 
great  to  be  raised  in  one  year  from  current  taxes. 

Suppose  that  a  small  city  raises  by  tax  each  year  five  hun- 
dred thousand  dollars  to  pay  its  expenses.  Its  tax  rate  may 
be  two  dollars  and  fifty  cents  for  each  hundred,  or  twenty-five 
dollars  for  each  thousand  dollars  of  taxable  property.  The 
assessed  valuation  .of  taxable  property  in  such  a  city,  having 
the  assumed  tax  rate  and  budget,  is  twenty  million  dollars. 
If  it  becomes  necessary  or  desirable  to  expend  two  hundred 
and  fifty  thousand  dollars  on  its  water  supply  system,  the 
effect  on  the  tax  rate  of  raising  all  the  money  in  one  year 
would  be  to  increase  it  to  three  dollars  and  seventy-five  cents 
a  hundred  or  thirty-seven  dollars  a  thousand.  This  exceeds 
the  rate  of  tax  which  can  be  endured  by  property  assessed  at 


THE  PROBLEM  STATED  3 

Its  full  cash  value.     Hence  the  money  for  the  water  supply 
system  must  be  borrowed  and  repaid  in  installments. 

As  evidence  of  the  borrowing,  the  city  authorizes  its 
proper  officers  to  execute  and  deliver  promises  to  repay  the 
borrowed  money  at  a  definite  time.  Such  instruments  are 
called  bonds  and  are  negotiable  instruments,  on  which  interest 
is  payable  at  an  agreed  rate  per  annum. 

It  not  infrequently  happens  that  the  necessity  for  a  bond 
issue  arises  from  pressure  exerted  by  local  banks.  The  annual 
municipal  revenues  may  have  fallen  short  and  the  deficiency 
of  taxes  may  have  forced  the  municipality  to  borrow  to  meet 
Its  running  expenses.  Obligations  Issued  in  anticipation  of 
current  revenues  ought  not  to  be  funded  and  may  not  be.  In 
States  having  proper  fiscal  statutes.  But  appropriations  may 
have  been  made  for  capital  expenditures,  and  local  banks  may 
have  loaned  the  city  money  for  a  short  period  until  taxes  are 
collected,  or  bonds  can  be  Issued. 

The  impulse  to  issue  bonds  may  come  when  a  bank  exam- 
iner calls  the  attention  of  the  bank  to  the  fact  that  It  holds 
too  much  city  paper — an  amount  beyond  the  limit  which  It  Is 
legally  authorized  to  lend  or  an  amount  too  great  In  relation 
to  Its  assets. 

Preliminary  steps. — The  necessity  having  arisen  and  the 
initiative  having  been  taken  by  the  executive,  the  financial 
officer  or  officers  consult  the  law-making  body,  such  as  the 
city  council  In  second  class  cities  in  New  York  State.  Ordi- 
narily the  city  council  has  a  committee  on  finance,  the  mem- 
bers of  which  have  had  little  or  no  experience  with,  or  under- 
standing of,  financial  problems.  Nevertheless,  the  finance 
committee  meets  and  confers  with  the  financial  officials  and 
It  is  agreed  that  bonds  must  be  Issued.  In  short,  the  finance 
committee  agrees  to  recommend  the  passage  of  appropriate 
local  legislation,  that  Is,  the  ordinance  or  resolution  author-  ^ 
Izing  the  bonds. 

Then  the  delegated  officials  confer  with  the  corporation 
counsel  and  the  latter  consults  with  counsel  who  makes  a 
specialty  of  municipal  business.  At  this  conference  the  facts 
are  laid  before  counsel.  The  interest  rate  which  the  pro- 
posed bonds  are  to  bear  Is  frequently  determined  after  con- 
sultation with  the  representatives  of  the  better  class  of  Invest- 
ment banking  houses,  the  term  or  length  of  time  the  bonds 
are  to  run  is  computed,  and  other  details  are  arranged. 


4  MUNICIPAL  BONDS 

Ordinance  authorizing  bond  issue. — An  ordinance  author- 
izing the  bonds  is  next  prepared  and  a  draft  submitted  to  the 
local  authorities  for  consideration.  If  satisfactory  in  form, 
it  is  introduced  in  the  local  legislative  body.  If  the  majority 
of  the  council  be  of  the  same  political  faith  as  the  officials  in 
charge  of  the  matter,  the  ordinance  is  made  an  administration 
measure  and  all  the  members  of  the  council  of  that  particular 
political  party  retire  around  a  corner  and  "caucus."  The 
minority  members  retire  around  another  corner  and  like- 
wise "caucus."  Then  it  shortly  appears  in  the  newspapers 
that  the  majority  party,  being  possessed  of  all  the  wisdom,  all 
the  intelligence  and  all  the  administrative  ability  of  the  na- 
tion, as  locally  represented,  is  about  to  introduce  an  ordi- 
nance for  the  issue  of  bonds. 

We  will  assume  that  the  ordinance  is  introduced,  prop- 
erly approved  in  caucus  and  adopted  by  the  necessary  vote. 
A  two-thirds  or  larger  vote  is  frequently  required.  Counsel 
then  prepares  the  necessary  resolution  prescribing  the  form 
and  contents  of  the  bond  and  setting  forth  the  notice  of  sale 
which  must  be  published. 

Printing. — If  the  market  is  fairly  stable  and  the  interest 
rate  can  be  regarded  as  settled,  it  is  usually  advisable  at  this 
point  actually  to  prepare — that  is,  engrave  or  print — the 
bonds  themselves.  The  practice  of  engraving  municipal 
bonds  has  practically  disappeared.  They  are  printed  on 
tinted  sheets  with  steel-engraved  borders  and  the  perfection 
of  printing  is  such  that,  everything  considered,  a  type-printed 
bond  makes  a  better  looking  instrument.  Regarding  coupons, 
experience  shows  that  they  should  be  reproduced  by  photo- 
lithography to  obtain  the  best  results. 

Publication  of  notice. — Public  sale  of  the  bonds  is  usually 
»required.  This  rheans  that  a  notice  must  be  published  de- 
scribing the  proposed  Issue  by  its  amount,  interest  rate,  ma- 
turity, and  the  like,  and  stating  that  the  bonds  of  the  issue 
will  be  offered  for  sale  at  a  specified  time  and  place.  During 
periods  of  daylight-saving  time  it  has  been  found  helpful  to 
specify  which  variety  of  time  is  meant.  The  notice  of  sale 
contains  all  the  provisions  which  an  intending  bidder  needs 
to  know  and  usually  calls  for  sealed  offers  or  proposals  for 
the  purchase  of  the  bonds  which  must  be  accompanied  by  a 
certified  good-faith  check  for  a  stated  percentage,  usually  two 
per  cent  of  the  amount  of  the  issue.     The  notice  should  be, 


THE  PROBLEM  STATED  5 

and  is  sometimes  required  to  be,  published  in  a  metropolitan 
financial  paper. 

Sale. — The  zero  hour  having  arrived,  representatives  of 
interested  bond  houses  meet  the  municipal  officials  in  charge 
of  the  matter  at  the  place  of  sale.  After  the  bids  have  been 
received  and  opened  for  consideration,  a  list  is  prepared  and 
the  highest  bidder  determined.  A  resolution  awarding  the 
bonds  to  the  successful  bidder  is  then  adopted. 

When  the  bonds  are  prepared  and  ready  for  delivery,  the 
purchasing  bond  house  is  notified.  Counsel  is  requested  to 
say  whether  or  not  the  bonds  can  be  taken  up.  When  all  is 
ready,  a  representative  of  the  purchaser  meets  with  the 
financial  officer  in  charge  of  the  delivery  and  brings  with  him 
a  certified  check  to  pay  for  the  bonds — the  amount  of  which 
check  has  previously  been  determined — and  the  bonds  are 
counted,  examined  as  to  signatures,  delivered,  and  paid  for. 

With  the  merchandising  of  the  bonds — the  sale  by  the 
dealer  to  the  ultimate  holder  or  investor — this  book  has 
no  concern.  The  various  kinds  of  municipal  bonds  which  find 
a  place  in  the  market  and  the  numerous  elements  which  deter- 
mine the  price  at  which  such  bonds  can  be  sold  under  ordinary 
conditions  are,  however,  discussed. 

Municipal  ordinances  and  budgets. — Reference  has  been 
made  to  the  budget  and  to  the  bond  ordinance  or  resolution. 
A  preliminary  reading  of  a  municipal  tax  ordinance,  budget, 
and  bond  ordinance,  and  consideration  of  the  form  of  each, 
will  be  helpful  to  an  understanding  of  the  discussions  of  prin- 
ciples. The  tax  ordinance  is  the  written  legislative  act  of  the 
local  board  or  body  having  the  power  to  levy  taxes,  which 
provides  for  the  levying  of  a  tax  for  municipal  purposes  and 
specifies  in  general  terms  the  objects  for  which  the  tax  is 
levied.  The  budget  specifies  in  detail  how  the  amount  of  tax 
is  to  be  expended.  The  bond  ordinance  is  the  legislative  act 
of  the  municipality,  authorizing  the  Issue  of  bonds.  Forms 
of  each  of  these  documents  follow  this  chapter. 

Tax  Ordinance  of  the  City  of  Clifton,  New  Jersey,  for  the 

Year  1922 

AN  ORDINANCE  RELATING  TO  TAXES  FOR  THE  YEAR  NINETEEN 
HUNDRED  AND  TWENTY-TWO 

BE  IT  ORDAINED,  by  the  City  Council  of  the  City  of  Clifton  that  there 
shall  be  assessed,  raised  by  taxation  and  collected  for  the  fiscal  year  1922  the 


6  MUNICIPAL  BONDS 

sum  of  Six  Hundred  Twenty-Six  Thousand,  Four  Hundred  Twenty-Three 
Dollars  and  Ninety  Cents  ($626,423.90),  for  the  purpose  of  meeting  the  appro- 
priations set  forth  in  the  following  statement  of  resources  and  appropriations 
for  the  fiscal  year  1922. 

RESOURCES 

Surplus  Revenue  Appropriated   None 

Miscellaneous   Revenues .$  76,900.00 

School  Monies  from  State,  School  Balances,  etc 102,000.00 

Revenue  from  other  sources  than  Taxes $178,900.00 


APPROPRIATIONS 

Appropriations  in   City  Budget $397,702.76 

Appropriations  for  School  Purposes 387,150.00 

Overexpenditure  of  Appropriations,  1921 18,053.65 

Deficit  Surplus  Revenue,   1921 ; 2,417,49 

$805,323.90 
Revenue  from  other  sources  than  Taxes 178,900.00 

Net  amount  to  be  raised  by  Taxation $626,423.90 


Budget  of  the  City  of  Clifton,  N.  J. 

For  the  Fiscal  Year  Beginning  January  i,  1922,  and  Ending 
December  31,  1922 

ANTICIPATIONS 

1922 

Surplus   Revenue    None 

Surplus  Revenue   Appropriated    None 

MISCELLANEOUS  ANTICIPATED: 

Fees  and  Permits   $  4,000.00 

Fines   and   Penalties    4,000.00 

Health  Permits    3,000.00 

Franchise   Tax    40,000.00 

Gross  Receipts  Tax  6,500.00 

Interests  and  Costs    7,100.00 

Licenses     4,300.00 

Poll  Tax  2,000.00 

Auto  Bus  Receipts   6,000.00 

$  76,900.00 
Amount  to  be  raised  by  Taxation 320,802.76 

$397,702.76 


THE  PROBLEM  STATED  7 

APPROPRIATIONS 

1922 
GENERAL  GOVERNMENT: 

Administrative   and  Executive    $  16,000.00 

Assessment  and  Collection   of  Taxes 9,200.00 

Department  of  Finance    1,200  00 

Interest   on   Current   Loans 7,000.00 

Grounds  and  Buildings    4,500.00 

Advertising,  Printing  and  Office  Supplies 5,500.00 

PRESERVATION  OF  LIFE  AND  PROPERTY: 

Police    65,000.00 

Police  Pension   Fund 2,600.00 

Fire    28,500.00 

Rental  of  Hydrants 5,000.00 

HEALTH  AND  CHARITIES: 

Healtfi    7,000.00 

Ctiarities    500.00 

Poor    5,000.00 

STREETS,  HIGHWAYS  AND  SEWERS: 

Cleaning  and  Maintenance  of  Streets 20,000.00 

Street  Improvement  Liabilities  1921,  1920,  1919 25,302.80 

Garbage   and   Aslies    12,500.00 

Lighting  of  Streets   17,500.00 

Trees    1,000.00 

Engineering   Department    14,000.00 

County  Bills  unpaid  1920-1921 32,298.15 

EDUCATION: 

Library    4,000.00 

DEBT  SERVICE: 

Payment  of  Bonds 30,000.00 

Payment  of  Sinking  Fund 13,936.26 

Interest   on    Bonds 59,700.00 

School  Construction  in  excess  of  bond  issue 465.55 

CONTINGENCIES    10,000.00 

$397,702.76 


School  Bond  Ordinance  for  the  City  of  Camden,  N.  J. 

AN    ORDINANCE    AUTHORIZING    THE    ISSUE    OF   $1,000,000    SCHOOL 

BONDS  OF  THE  CITY  OF  CAMDEN  AND  PROVIDING 

FOR  THEIR  PAYMENT 

RECITALS: 

Pursuant  to  due  action  by  the  Board  of  Education  and  the  Board  of  School 
Estimate  an  appropriation  has  been  requested  for  certain  school  purposes  as 
follows: 

Purpose  Cost 

Building  and  furnishing  two  new  fireproof  school  houses. ..  .$  385,000 
Building    and    furnishing    additions    to    three    non-fireproof 

school  houses   425,000 

Building  fireproof  administration  building  and  stockroom...        50,000 


MUNICIPAL  BONDS 

Purpose  Cost 

Furnishing  machine  shop  in  new  high  school 65,000 

Constructing  cement  sidewalks  and  fences  for  all  schools 75,000 


$1,000,000 


It  is  advisable  to  issue  bonds  to  provide  funds  for  said  purposes  in  pur- 
suance of  an  Act  of  the  Legislature  of  the  State  of  New  Jersey  entitled:  "An 
Act  to  establish  a  thorough  and  efficient  system  of  free  public  schools,  and  to 
provide  for  the  maintenance,  support  and  management  thereof,"  approved 
October  19,  1903,  as  amended. 

The  average  of  the  different  periods  assigned  by  said  statute  for  the 
maturity  of  bonds  issued  for  said  purposes,  taking  into  consideration  the  amount 
of  bonds  to  be  issued  as  herein  provided  for  said  several  purposes,  is  thirty- 
three   (33)   years. 

BE  IT  ORDAINED  BY  THE  CITY  COUNCIL  OF  THE  CITY  OF 
CAMDEN: 

Section  I.  School  bonds  of  the  City  shall  be  issued  in  the  aggregate 
principal  amount  of  $1,000,000,  shall  be  dated  May  1,  1922,  and  $30,000  thereof 
shall  mature  on  May  1  in  each  of  the  years  1923  to  1945  inclusive  and  $31,000 
thereof  shall  mature  on  May  1  in  each  of  the  years  1946  to  1955  inclusive. 
Said  bonds  shall  bear  interest  at  the  rate  of  five  per  centum  (5%)  per  annum, 
payable  semi-annually  on  May  1  and  November  1  in  each  year,  shall  be  of  the 
denomination  of  $1,000  each,  and  shall  be  in  such  form  as  may  be  provided  by 
resolution. 

Section  2.  Said  bonds  shall  be  sold  at  public  sale  as  provided  by  law,  or  if 
no  bids  are  received  at  public  sale,  then  at  private  sale. 

Section  3.  In  each  year  after  the  issuance  of  said  bonds,  the  City  shall  in 
its  annual  tax  levy  raise  money  sufficient  to  pay  the  interest  and  principal  of 
such  bonds  as  may  mature  during  such  year. 

Section  4.  This  Council  does  hereby  concur  in  and  consent  to  the  appro- 
priation referred  to  in  the  preambles  hereof,  and  to  the  issuance  of  the  bonds 
herein  authorized. 

Section  5.  All  ordinances  and  parts  of  ordinances  in  conflict  herewith 
are  hereby  repealed.    This  ordinance  shall  take  effect  immediately. 


Chapter  II 
THE  MUNICIPAL  BOND 

Conditions  of  negotiability. — Generally  speaking,  bonds 
are  not  negotiable  instruments.  This  is  probably  true  with- 
out qualification  as  to  the  bonds  of  individuals,  and  the  excep- 
tion is  in  the  case  of  bonds  issued  by  various  bodies  corporate 
and  politic.  The  development  of  modern  business  has  made 
it  necessary  that  these  obligations  should  be  easily  and  readily 
transferable,  and  that  purchasers  should  take  them  free  of 
all  latent  equities. 

The  municipal  coupon  bond  payable  to  bearer  or  order 
is  a  negotiable  instrument,  having  all  the  attributes  of  nego- 
tiable paper  under  the  law  merchant  and  the  uniform  nego- 
tiable instruments  laws  of  the  various  States.  The  United 
States  Supreme  Court  has  said:  "Obligations  of  municipali- 
ties in  the  form  of  these  in  suit  here  are  placed,  by  numerous 
decisions  of  this  Court,  on  the  footing  of  negotiable  paper. 
They  are  transferable  by  delivery  and,  when  issued  by  com- 
petent authority,  pass  into  the  hands  of  a  bona  fide  purchaser 
for  value  before  maturity,  freed  from  any  infirmity  in  their 
origin";^  and  whenever  the  question  has  arisen,  it  has  been 
so  decided  where  the  bond  has  been  properly  drawn. 

The  conditions  of  negotiability,  so  far  as  applicable  to 
municipal  bonds,  are : 

A.  The  instrument  must  be  in  writing  and  signed  by  the  maker  or 

drawer, 

B.  It  must  contain   an  unconditional  promise  or  order  to  pay  a  cer- 

tain sum  of  money, 

C.  On  demand,  or  at  a  fixed  or  determinable  future  time, 

D.  To  order  or  bearer. 

Brief  consideration  will  show  that  a  municipal  bond,  pay- 
able to  bearer  or  order,  has  all  the  elements  of  negotiable 
paper.     It  remains  a  "negotiable  instrument"  if  registered,^ 

^Cromivell  v.  Sac  (1877),  96  U.  S.  51. 

*  Daniels,  p.  1683;  D'Esterre  v.  Nenv  York  (1900),  104  Fed.  605. 

9 


10  MUNICIPAL  BONDS 

but  if  properly   registered,   Its  negotiable   character  may  be 
said  temporarily  to  be  suspended.^ 

Bona  fide  purchaser  has  good  title. — The  Incidents  and 
consequences  of  such  negotiability  need  not  be  fully  considered 
here,  and  belong  indeed  to  the  study  of  negotiable  Instru- 
ments, as  such.  For  our  particular  purposes,  it  is  important 
only  to  note  that  there  is  no  defense  to  a  suit  for  payment 
of  a  negotiable  Instrument  (valid  In  its  Inception)  in  the 
hands  of  one  who  has  acquired  It  before  maturity,  for  value 
and  without  notice  of  any  defenses.  The  settled  rule  of  com- 
mercial law  is  that  one  is  a  bona  fide  purchaser  of  negotiable 
paper  (such  as  Is  a  properly  drawn  and  issued  municipal 
bond)  who  takes  It  before  maturity  and  without  notice  of 
equities,  and  such  purchaser  Is  said  to  obtain  a  perfect  title. 
One  who  purchases  from  a  bona  fide  holder  gets  as  good  a. 
title  as  the  seller  had. 

Instrument  void  in  inception  never  valid. — It  must  be 
kept  in  mind,  however,  that  the  protection  afforded  a  bona 
fide  holder  of  a  negotiable  municipal  bond  does  not  validate 
an  instrument  which  Is  void  in  its  Inception;  that  is,  a  bond 
which  the  municipality  has  no  power  to  issue.  The  analogy 
between  such  a  bond  and  the  promissory  note  of  a  lunatic  is 
perfect.  A  lunatic  after  "office  found,"  that  is,  after  a 
sheriff's  jury  has  declared  the  individual  to  be  "non  compos 
mentis,"  has  no  power  whatsoever  to  make  a  contract.  Hence 
a  lunatic  (after  "office  found")  cannot  make  a  valid  promis- 
sory note.  Whatever  the  instrument  is,  it  is  not  a  negotiable 
instrument  with  the  attributes  of  negotiability. 

Different  forms  of  bonds. — The  form  of  a  municipal 
coupon  bond,  registerable  at  the  option  of  the  holder  as  to 
principal  only  or  as  to  both  principal  and  Interest,  with  its 
coupons,  conversion  certificate  and  registration  gridiron,  fol- 
lows this  chapter.  Such  bond  is  payable  to  bearer  and  hence 
is  transferable  by  delivery.  If  the  owner  so  desires,  it  may 
be  registered  as  to  principal  in  his  name,  after  which  regis- 
tration it  is  payable  only  to  the  person  in  whose  name  it  Is 
registered,  until  such  registration  Is  changed.  The  owner 
may  also  cause  It  to  be  fully  registered,  that  Is,  as  to  interest 
as  well  as  to  principal.  If  this  is  to  be  done,  the  coupons  are 
detached  and  cancelled  and  the  fact  noted  on  the  conversion 
certificate. 

'Switzerland  v.  R.  R.  (N.  Y.,  1912),  152  App.  Div.  at  75. 


THE  MUNICIPAL  BOND  11 

Forms  of  coupon  and  registered  bonds  used  in  New  York 
follow  the  New  Jersey  form  first  referred  to.  The  peculiarity 
of  a  New  York  coupon  bond  is  that  while  it  may  be  fully 
registered — that  is,  as  to  both  principal  and  interest — it  may 
not  be  registered  as  to  principal  only.  A  bond  in  the  form 
first  given  may  be  registered  as  to  principal  only  and  the 
coupons  may  continue  to  pass  by  delivery  as  they  are  not 
affected  by  such  registration. 

The  narrative  of  a  bond. — The  narrative  of  a  bond  begins 
with  the  name  oi  the  promising  corporation  which  should 
always  be  its  correct  legal  corporate  title.  A  mere  misnomer 
does  not  In  most,  if  not  all,  jurisdictions  affect  the  validity  of 
the  instrument  but  it  is  apt  to  make  the  draftsman  feel  fool- 
ish. Some  cities  have  curious  names.  Trenton,  New  Jersey, 
for  instance,  is  "The  Inhabitants  of  the  City  of  Trenton." 
Hoboken,  no  longer  having  a  council,  and  whose  mayor  Is  only 
such  for  ceremonial  purposes,  is  legally  known  as  "The 
Mayor  and  Council  of  the  City  of  Hoboken."  New  York 
City  was  until  recently  "The  Mayor,  Aldermen  and  Com- 
monalty of  the  City  of  New  York."  Apparently  everybody 
but  the  mayor  and  aldermen  constituted  the  common  herd. 

The  present  tendency  is  toward  short  names,  and  many  mu- 
nicipalities, particularly  in  New  Jersey,  have  taken  advantage 
of  the  permission  contained  In  general  statutes  to  shorten 
their  long  and  unwieldy  titles. 

The  clause  "for  value  received"  deserves  consideration. 
No  contract  Is  valid  without  a  consideration — something  paid 
or  done  to  Induce  the  promise  to  be  made.  If  the  maker  of 
the  promise — that  is,  the  bond — says  It  has  "received  value," 
it  will  not  be  heard  to  deny  the  truth  of  the  statement. 

Next  comes  the  promise  to  pay  to  the  bearer  of  the  bond 
a  designated  sum  of  money,  usually  one  thousand  dollars,  on 
a  definite  date  and  to  pay  interest  at  a  specified  rate  per  cent 
at  certain  times.  The  medium  of  payment,  that  is  whether 
gold  coin,  lawful  money,  or  whether  payable  in  New  York 
exchange,  Is  stated,  as  is  also  the  place  of  payment. 

Parenthetically  we  may  note  that  the  bond  differs  from 
most  other  bonds  In  that  It  does  not  begin  with  "Know  all 
men  by  these  presents."  This  expression  went  out  of  fashion 
some  years  ago,  and  now  obtains  only  in  localities  where  legal 
verbiage  is  more  Important  than  legal  effect. 

Registered  versus  coupon  bonds. — The  covenant  as  to 


12  MUNICIPAL  BONDS 

registration  follows.  Until  recently  (although  of  late  years 
the  individual  investor  has  acquired  prominence  as  a  pur- 
chaser of  municipals)  savings  banks,  insurance  companies  and 
trustees  were  the  purchasers  of  most  municipals,  and  pre- 
ferred to  have  their  bonds  registered,  thus  making  it  unnec- 
essary for  their  officers  and  agents  to  cut  coupons  and  acquire 
the  coupon  thumb.  The  real  purpose  was  to  suspend  nego- 
tiability, in  order  to  protect  their  securities  from  theft.  The 
individual  investor  wants  coupon  bonds,  which  are  transfer- 
able by  delivery,  and  the  ownership  of  which  is  not  evidenced 
by  registration. 

The  description  of  the  issue  ordinarily  sets  out  its  prin- 
cipal amount  and  maturities.  This  is  followed  by  a  refer- 
ence to  the  statute  which  authorizes  the  issue  of  the  bond 
and  ordinarily  a  reference  to  local  legislation. 

Dillon's  estoppel  clause. — The  value  of  such  a  clause  is 
great,  for  it  means  that  all  acts  and  things  necessary  to  be 
done  have  been  done  in  a  legal  manner.  An  estoppel  is  not, 
however,  complete  protection,  for  the  officer  signing  the  bond 
must  have  authority  to  make  it  and  no  recital  can  make  up 
for  an  entire  lack  of  authority.  This  should  always  be  kept  in 
mind  by  the  prospective  bond  purchaser. 

"If  a  municipal  corporation,  having  general  authority  to 
issue  bonds  for  specified  purposes,  puts  forth  a  negotiable 
municipal  bond  issued  for  a  lawful  purpose,  and  therein  re- 
cites, through  its  duly  authorized  officials,  whose  province 
and  duty  it  is  to  ascertain  and  peculiarly  to  know  the  facts, 
compliance  with  the  specific  provisions  of  the  law  essential  to 
the  issuance  of  the  bond,  the  municipality  is,  as  against  a  bona 
fide  holder  of  the  bond,  purchasing  for  value,  and  on  faith  of 
the  recitals,  estopped  to  deny  the  truthfulness  of  the 
recitals."  ^ 

"Nothing  is  better  settled  than  this  rule — that  the  pur- 
chaser of  bonds,  such  as  these,  is  held  to  know  the  constitu- 
tional provisions  and  the  statutory  restrictions  bearing  on  the 
question  of  the  authority  to  issue  them;  also  the  recitals  of 
the  bonds  he  buys;  while,  on  the  other  hand,  if  he  act  in  good 
faith  and  pay  value,  he  is  entitled  to  the  protection  of  such 
recitals  of  facts  as  the  bonds  may  contain."  ^ 

The  face  of  the  bond  ends  with  the  testimonium,  or  name 

*To'wn  of  Climax  v.  Burnside  (Ga.  1920),  ISO  Ga.  556;  104  S.  E.  435. 
'Lake  Co.  v.  Graham  (1888),  130  U.  S.  674  at  680. 


THE  MUNICIPAL  BOND  13 

of  the  promissor,  and  statement  of  the  official  character  of  the 
officers  signing  the  instrument,  the  date  of  the  instrument, 
the  signatures  of  the  officers  and  the  corporate  seal. 

The  coupons  attached  call  for  the  payment  of  a  definite 
sum,  usually  a  half  year's  interest,  on  a  definite  date  and  they 
are  separate  and  independent  promises  to  pay  and  In  them- 
selves constitute  negotiable  instruments. 

On  the  back  of  the  bond,  ordinarily  called  the  panels,  the 
conversion  certificate  usually  appears,  and  the  registration 
gridiron,  the  purposes  of  which  are  obvious. 

Municipal  bond  rarely  secured  by  lien  on  specific  prop- 
erty.— In  conclusion,  it  should  be  noted  that  the  municipal 
bond  is  rarely  secured  by  a  lien  on  specific  property.  A  lien 
in  the  strict  legal  sense  is  the  right  of  a  creditor  to  sell  prop- 
erty belonging  to  the  debtor  to  satisfy  the  debt.  Many  bonds 
of  private  corporations  are  liens  on  real  estate  but  a  municipal 
bond,  payable  as  we  shall  see  from  moneys  raised  by  taxation, 
is  a  lien  upon  nothing,  not  even  on  the  general  revenues  of  the 
municipality  issuing  it.  The  means  of  obtaining  funds  to  pay 
the  bond  and  the  remedy  of  the  bondholder  in  case  of  default 
are  discussed  in  subsequent  chapters. 


Form  of  New  Jersey  Coupon  Bond,  Registerable  as  to 
Principal  Only  or  as  to  Both  Principal  and  Interest 

No.  $1,000. 

STATE  OF  NEW  JERSEY,  THE  CITY  OF  CAMDEN 

SCHOOL  BOND 

The  City  of  Camden,  a  municipal  corporation  of  the  State  of  New  Jersey, 
for  value  received,  promises  to  pay  to  the  bearer  of  this  bond,  or  if  it  be  regis- 
tered, to  the  registered  holder  on  the  first  day  of  May,  19  ,  the  sum  of  one 
thousand  dollars  ($1,000.)  and  to  pay  interest  thereon  at  the  rate  of  four  and 
one-half  per  centum  (4j/2%)  per  annum,  semi-annually  on  the  first  days  of 
May  and  November  in  each  year  from  the  date  of  this  bond  until  it  matures, 
upon  presentation  and  surrender  as  they  severally  mature  of  the  coupons 
therefor  annexed  hereto,  or  if  this  bond  be  registered  as  to  both  principal  and 
interest,  then  to  the  registered  holder.  Both  principal  and  interest  of  this  bond 
will  be  paid  in  lawful  money  of  the  United  States  of  America,  at  the  ofBce  of 
the  City  Treasurer  of  said  City. 

This  bond  may  be  registered  as  to  principal  by  the  holder  in  his  name  on 
the  books  of  the  City,  kept  in  the  office  of  the  City  Treasurer,  and  such  regis- 
tration shall  be  noted  on  the  back  of  this  bond,  after  which  no  valid  transfer 
of  this  bond  shall  be  made  except  on  said  books  until  after  registered  transfer 
to  bearer.     Such  registration  shall   not  affect  the  negotiability  of  the  coupons 


14  MUNICIPAL  BONDS 

which  shall  continue  to  pass  by  delivery.  At  the  request  of  the  holder,  thi3 
bond  will  be  converted  into  a  bond  registered  as  to  both  principal  and  interest 
and  the  coupons  annexed  hereto  detached  and  cancelled  and  thereafter  both 
principal  and  interest  shall  be  payable  only  to  the  registered  holder. 

This  bond  is  one  of  an  issue,  the  authorized  principal  amount  of  which 
is  $1,000,000,  the  bonds  of  which  are  of  like  tenor,  except  as  to  maturity,  and 
is  issued  pursuant  to  an  Act  of  the  Legislature  of  the  State  of  New  Jersey, 
entitled:  "An  Act  to  establish  a  thorough  and  efficient  system  of  free  public 
schools  and  to  provide  for  the  maintenance,  support  and  management  thereof," 
approved  October  19,  1903,  and  the  acts  amendatory  thereof  and  supplemental 
thereto,  and  an  ordinance  of  said  City  entitled:  "An  Ordinance  authorizing  the 
issue  of  $1,000,000  School  Bonds  of  the  City  of  Camden  and  providing  for  their 
payment"  duly  adopted  April  13,  1922,  and  published  as  required  by  law. 

It  is  hereby  certified  and  recited  that  all  conditions,  acts  and  things  re- 
quired by  the  Constitution  and  Statutes  of  the  State  of  New  Jersey  to  exist, 
to  have  happened  and  to  have  been  performed,  precedent  to  and  in  the  issuance 
of  this  bond  exist,  have  happened,  and  have  been  performed,  and  that  the  issue 
of  bonds  of  which  this  is  one,  together  with  all  other  indebtedness  of  said  City, 
is  within  every  debt  and  other  limit  prescribed  by  the  Constitution  and  Statutes 
of  said  State. 

IN  WITNESS  WHEREOF,  the  City  of  Camden  has  caused  this  bond  to  be 
signed  by  its  Mayor  and  City  Comptroller  under  the  seal  of  the  City  and 
attested  by  the  City  Clerk  and  the  coupons  hereto  annexed  to  be  authenticated 
by  the  facsimile  signature  of  the  City  Treasurer  and  this  bond  to  be  dated  the 
first  day  of  May,  1922. 


Mayor 
City  Comptroller 


Attest: 

City  Clerk 


Form  of  Coupon 
No.  $22.50 

The  City  of  Camden,  a  municipal  corporation  of  the  State  of  New  Jersey, 

will  pay  to  the  bearer  on  the   1st  day  of ,  19.  . .  ., 

the  sum  of  Twenty-two  and  50/100  Dollars  ($22.50)  in  lawful  money  of  the 
United  States  of  America,  at  the  office  of  the  City  Treasurer  of  said  City,  being 
six  months  interest  then  due  on  its  School  Bond  dated  May  1,  1922,  and  bear- 
ing No 


City  Treasurer 


Certificate  of  Registration 

I  hereby  certify  that  at  the  request  of  the  holder  of  the  within  bond,  for  its 
conversion  into  a  bond  registered  as  to  both  principal  and  interest,  I  have  this 

day  cut  off  and  destroyed coupons  attached  thereto,  numbered 

from to ,  inclusive,  of  the  amount  and  value  of 

Twenty-two  and  50/100  Dollars   ($22.50)   each,  amounting  in  the  aggregate  to 

Dollars   ($ ),   and  that  the  within  bond  is 

hereby  converted  into  a  registered  bond,  with  the  principal  thereof  and  semi- 


THE  MUNICIPAL  BOND  15 

annual  interest  thereon  payable  to ,  assignee 

or  legal  representative. 

Dated ,19 


City  Treasurer 
The  within  bond  has  been  registered  as  follows: 


Date  of  Registry 


Name  of  Registered  Holder 


Registered  by 


Form  of  New  York  Coupon  Bond,  Registerable  Only  as  to 
Both  Principal  and  Interest 

No.  1  $1000. 

UNITED  STATES  OF  AMERICA,  STATE  OF  NEW  YORK, 

COUNTY  OF  WESTCHESTER,   VILLAGE   OF  RYE 

WATER  BOND 

The  Village  of  Rye,  a  municipal  corporation  of  the  State  of  New  York,  for 
value  received  promises  to  pay  to  bearer,  or  if  this  bond  be  registered,  to  the 
registered  holder  hereof,  on  the  first  day  of  December,  1922,  the  sum  of  One 
Thousand  Dollars  ($1000),  and  to  pay  interest  thereon  at  the  rate  of  five  per 
centum  (59f)  per  annum,  payable  semi-annually  on  June  1  and  December  1 
in  each  year,  upon  presentation  and  surrender  as  they  severally  mature,  of  the 
coupons  therefor  annexed  hereto,  or  if  this  bond  be  registered,  then  to  the 
person  in  whose  name  it  is  registered.  Both  principal  and  interest  of  this  bond 
are  payable  in  lawful  money  of  the  United  States  of  America  at  the  office  of 
the  Village  Treasurer. 

This  bond  may  be  converted  into  a  registered  bond,  as  provided  by  the 
General  Municipal  Law,  and  be  registered  on  the  books  of  the  Village,  and 
thereafter  is  transferable  only  upon  presentation  to  the  Clerk  thereof  with  a 
written  assignment  duly  acknowledged  or  proved.  Upon  presentation  thereof, 
with  such  assignment,  the  Clerk  will  note  such  transfer  on  this  bond  and  on 
said  books. 

This  bond  is  one  of  an  issue  of  $10,000  bonds  of  like  date  and  tenor,  except 
as  to  denomination  and  maturity,  numbered  from  1  to  100  inclusive,  issued 
pursuant  to  the  provisions  of  the  Village  Law,  constituting  Chapter  64  of  the 
Consolidated  Laws  of  the  State  of  New  York,  and  a  proposition  adopted  at  an 
election  held  in  said  Village  on  November  8,  1921,  and  a  resolution  of  the 
Board  of  Trustees  of  said  Village  adopted  November   10,   1921. 

It  is  hereby  certified  and  recited  that  all  conditions,  acts  and  things  required 
by  the  Constitution  and  Statutes  of  the  State  of  New  York  to  exist,  to  have 
happened  and  to  be  performed  precedent  to  and  in  the  issuance  of  this  bond 
exist,  have  happened  and  have  been  performed,  and  that  the  issue  of  bonds  of 
which  this  is  one,  together  with  all  other  indebtedness  of  said  Village,  is 
within  every  debt  and  other  limit  prescribed  by  the  Constitution  and  Laws  of 
said  State. 

IN  WITNESS  WHEREOF,  the  Village  of  Rye  has  caused  this  bond  to  be 
signed  by  its  President  and  its  Village   Treasurer   and   the  corporate  seal   of 


16 


MUNICIPAL  BONDS 


said  Village  to  be  hereunto  affixed  and  attested  by  its  Village  Clerk  and  the 
coupons  hereto  attached  to  be  authenticated  with  the  facsimile  signature  of  its 
Village  Treasurer,  and  this  bond  to  be  dated  December  1,  1921. 

President 
Village  Treasurer 
ATTEST: 

Village  Clerk 

(Corporate  Seal) 

Form  of  Coupon 
No.  $ 

The  Village  of  Rye,  a  municipal  corporation  of  the  State  of  New  York, 
will  pay  to  the  bearer  on  the  first  day  of  June,  1922,  the  sum  of  Twenty-five 
($25.)  Dollars,  in  lawful  money  of  the  United  States  of  America  at  the  office 
of  the  Village  Treasurer,  being  six  months'  interest  then  due  on  its  Water 
Bond,  dated  December   1,   1921,  bearing  Number   1. 

Village  Treasurer 

Conversion  Certificate 

WE  HEREBY  CERTIFY  that  upon  the  presentation  of  the  within  bond 
with  a  written  request  by  the  owner  thereof  for  its  conversion  into  a  registered 
bond,  we  have  this  day  cut  off  and  destroyed  coupons  attached  thereto,  num- 
bered   from to inclusive,    of    the    amount 

and  value  of  Twenty-five   ($25.)   Dollars  each,  amounting  in  the  aggregate  to 

Dollars,  and  that  the  interest  at  the  rate  of  five  per  centum   (5%) 

per  annum,  payable  semi-annually  on  June  1   and  December  1  in  each  year,  as 

was  provided  by  the  coupons,  as  well  as  the  principal,  is  to  be  paid  to 

legal   representatives,   successors  or   assigns,   at 

the   place   stated   in   the   coupons. 

Dated, ,  19.... 

President 

Village  Treasurer 

Village  Clerk 

Registration  Certificate 

IT  IS  HEREBY  CERTIFIED  that  the  within  bond  was  this  day  registered 
in  the  name  of  the  payee  above  named  in  the  books  kept  in  the  office  of  the 
Village  Clerk  of  the  Village  of  Rye,  and  is  transferable  only  upon  presentation 
to  said  Clerk  with  a  written  assignment  duly  acknowledged  or  proved,  at 
which  time  the  name  of  the  assignee  shall  be  entered  hereon  and  in  said  books 
by  said  Clerk. 

IN  WITNESS  WHEREOF,  I  have  hereunto  set  my  hand  and  official  seal 

this day  of ,19 

Village  Clerk 


This  Bond  is  Registered  as  Follozvs: 


Date  of 

Registration 


Name  of 
Registered  Holder 


Village 
Clerk 


THE  MUNICIPAL  BOND 


17 


Form  of  New  York  Registered  Bond 

No.   1  $1000 

UNITED  STATES  OF  AMERICA,  STATE  OF  NEW  YORK, 

COUNTY  OF  ROCKLAND,   VILLAGE  OF  SUFFERN 

PAVING  BOND 

The  Village  of  Suffern,  a  municipal  corporation  of  the  State  of  New  York, 
hereby  acknowledges  itself  indebted  and  for  value  received  promises  to  pay 
to  John  Doe,  legal  representatives,  successors  or  assigns,  the  sum  of  One  Thou- 
sand Dollars  ($1000)  on  the  first  day  of  December,  1922,  with  interest  thereon 
from  the  date  hereof  at  the  rate  of  five  per  centum  {5%)  per  annum,  payable 
semi-annually  on  June  1  and  December  1  in  each  year  until  this  bond  matures. 
Both  principal  and  interest  of  this  bond  are  payable  in  lawful  money  of  the 
United  States  of  America  at  the  office  of  the  Village  Treasurer. 

This  bond  is  registered  on  the  books  of  the  village  clerk  and  is  transferable 
only  upon  presentation  to  such  clerk  with  a  written  assignment  duly  acknowl- 
edged or  proved.  Upon  presentation  of  this  bond  with  such  an  assignment  the 
clerk  will  note  such  transfer  on  this  bond  and  on  said  books. 

This  bond  is  one  of  an  issue  of  $10,000  bonds  of  like  date  and  tenor,  except 
as  to  denomination  and  maturity,  numbered  from  1  to  10  inclusive,  issued  pur- 
suant to  the  provisions  of  the  Village  Law,  constituting  Chapter  64  of  the 
Consolidated  Laws  of  the  State  of  New  York,  and  a  proposition  duiy  adopted 
at  an  election  held  in  said  village  November  8,  1921,  and  a  resolution  of  the 
Board  of  Trustees  of  said  village  adopted  November  10,  1921. 

It  is  hereby  certified  and  recited  that  all  conditions,  acts  and  things  re- 
quired by  the  constitution  and  statutes  of  the  State  of  New  York  to  exist,  to 
have  happened  and  to  be  performed  precedent  to  and  in  the  issuance  of  this 
bond,  exist,  have  happened  and  have  been  performed,  and  that  the  issue  of 
bonds  of  which  this  is  one,  together  with  all  other  indebtedness  of  said  village, 
is  within  every  debt  and  other  limit  prescribed  by  the  constitution  and  laws  of 
said  state. 

IN  WITNESS  WHEREOF,  the  village  of  Suffern  has  caused  this  bond  to 
be  signed  by  its  President  and  its  Village  Treasurer,  and  the  corporate  seal  of 
said  Village  to  be  hereunto  affixed  and  attested  by  its  Village  Clerk  this  first 
day  of  December,  1921. 

President 
Village  Treasurer 
ATTEST: 

Village  Clerk 
(Corporate  Seal) 

Form  for  Registration 

This  bond  is  registered  as  follows: 


Date  of 

Registry 

Name  of 
Registered  Owner 

Village 
Clerk 

Chapter  III 
MUNICIPAL  CORPORATIONS 

Definition. — A  corporation  is  a  legal  person,  perfectly  dis- 
tinct from  the  members  which  compose  it,  having  a  special 
name  and  having  such  powers  and  such  only,  as  the  law  pre- 
scribes. As  Lord  Coke  says,  it  is  "invisible,  immortal, 
having  no  conscience  or  soul."  A  corporation  can  sue  and 
be  sued,  have  a  common  seal  and  have  a  continuous  legal 
existence.  A  municipal  corporation  consists  of  the  inhabitants 
of  a  given  area  constituted  by  the  sovereign  a  body  politic 
and  corporate  for  the  purposes  of  local  government.  Essen- 
tially its  corporate  character  or  virtus  does  not  differ  from 
that  of  a  corporation  as  usually  defined.  The  difference  is 
in  the  powers  granted  by  charter.  And  we  hear  so  much  of 
civic  righteousness  and  civic  conscience  that  we  are  con- 
strained to  think  municipal  corporations  must  have   a  soul. 

A  municipality  is  a  creature  of  the  State  or  sovereign. 
As  Governor  Miller  said  in  an  address  to  a  delegation  of  New 
York  City  business  men  on  March  15,  1921 : 

There  has  been  a  good  deal  of  talk  about  home  rule  with  respect  to  this 
and  other  subjects  and  it  has  been  made  a  sort  of  a  fetish  to  cover  misrule  and 
misgovernment,  and  the  people  who  are  talking  of  it  with  respect  to  the  mu- 
nicipalities of  the  State  are  looking  at  it  from  an  entirely  wrong  angle. 

The  municipalities  have  been  created  by  the  State.  They  are  the  mere 
creatures  of  the  State  as  agencies  for  local  administration,  and  their  justifica- 
tion or  excuse  for  the  exercise  of  power  stops  at  the  point  where  they  cease  to 
be  able  effectively  and  efficiently  to  handle  the  problems. 

The  welfare  of  the  entire  State  is  intimately  bound  up  in  the  welfare  of  the 
City  of  New  York.  Now,  the  State  has  a  responsibility  which  it  cannot  shirk. 
I  believe  in  the  very  greatest  measure  possible  for  local  self-government,  and 
by  that  I  mean  of  municipal  local  self-government,  and  by  "possible"  I  mean 
the  greatest  measure  that  is  compatible  with  good  government;  but  the  pur- 
pose of  these  municipal  governments  is  to  administer  their  functions  in  the 
interest  of  the  people,  and  when  they  cease  to  be  able  to  do  that  in  reference 
to  any  given  matter  they  cease  to  have  any  case  whatever  to  support  an  argu- 
ment for  home  rule,  in  my  judgment.^ 

Municipalities  subject  to  legislature  of  State. — These  or- 
ganizations are,  of  course,  subject  to  the  legislature  of  the 

^  Nnu  York  Evening  Post,  March  15,  1921. 

18 


MUNICIPAL  CORPORATIONS  19 

State,  and  their  acts,  if  they  violate  the  law  or  aflfect  private 
rights,  are  also  subject  to  judicial  cognizance  and  judgment. 
They  are  under  the  law  and  are  bound  to  obey  it.  While  the 
community  is  entitled  to  local  government,  it  cannot  claim, 
as  against  the  State,  any  particular  charter  or  form  of  local 
government. 

The  constitution  of  each  State  contains  provisions  in- 
tended to  make  clear  the  principle  of  legislative  control  of 
municipalities,  and  to  limit  legislative  interference.  Thus  in 
the  constitution  of  New  York  State  we  find: 

"It  shall  be  the  duty  of  the  legislature  to  provide  for  the 
organization  of  cities  and  incorporated  villages";  ^  and  "Cor- 
porations may  be  formed  under  general  laws;  but  shall  not 
be  created  by  special  act,  except  for  municipal  purposes,  and 
in  cases  where,  in  the  judgment  of  the  legislature,  the  objects 
of  the  corporation  cannot  be  attained  under  general  laws. 
All  general  laws  and  special  acts  passed  pursuant  to  this  sec- 
tion may  be  altered  from  time  to  time  or  repealed."  ^ 

The  reservation  of  power  in  this  last  sentence  was  ren- 
dered necessary  by  the  Dartmouth  College  case  ^  and  is  found 
in  practically  all,  if  not  all,  State  constitutions. 

The  legislature  of  New  York,  pursuant  to  the  mandate  to 
"provide  for  the  organization  of  cities  and  incorporated  vil- 
lages," has  provided  uniform  charters  for  second-class  cities  ^ 
(in  such  a  defective  way  that  each  second-class  city  has  been 
obliged  to  obtain  a  supplementary  charter),  villages,*^  and 
towns. ^ 

The  constitution  of  New  Jersey  directs  the  legislature  to 
provide  general  laws  to  regulate  "the  internal  affairs  of 
towns,  and  counties";  and  prohibits  the  passage  of  private, 
local  or  special  laws.^  Town  by  judicial  construction  includes 
cities,  boroughs  and  villages.  Despite  the  prohibition,  spe- 
cial acts  are  numerous,  masquerading  as  general  laws,  and 
"ripper"  bills  mark  each  legislative  session. 

It  is  one  of  the  fundamental  principles  of  constitutional 
government  that  the  legislature  of  a  State  cannot  delegate  the 

"Art.  XII,  Sec.  1. 
"Art.  VIII,  Sec.  1. 

*  Dartmouth  College  v.  Woodijoard,  4  Wheat.   (U.  S.)  518. 

*  Cons.  Laws,  Chap.  53. 
*Cons.  Laws,  Chap.  64. 
'  Cons.  Laws,  Chap.  62. 
"Art.  IV,  Sec.  VII,  sub.  2. 


20  MUNICIPAL  BONDS 

power  to  make  laws,  which  has  been  entrusted  to  It  by. the  peo- 
ple, but  the  creation  of  municipalities  exercising  local  self- 
government  has  never  been  held  to  trench  upon  that  rule. 

Creation  of  municipalities. — Municipalities  may  be 
created  by  special  charter,  which  are  their  "articles  of  incor- 
poration," stating  the  name,  defining  the  territorial  limits, 
limiting  the  electorate  and  granting  powers  of  government. 
Such  charter  may  be  and  frequently  Is  amended,  altered  or  re- 
pealed. For  an  example  of  what  Is  ordinarily  known  as  a 
"scissors  and  paste  charter,"  the  reader  Is  referred  to  that 
remarkable  document  known  as  the  Charter  of  the  City  of 
Cohoes,^  the  fiscal  provisions  of  which  are  about  as  clear  as 
the  narrative  of  the  Mormon  bible. 

Municipalities  may  be  created  pursuant  to  general  laws. 
Thus  in  New  York  State  a  number  of  people,  living  In  a 
limited  area,  may,  by  taking  proper  proceedings,  form  a 
village, ^°  and  In  many  jurisdictions  cities  may  be  so  formed. 

In  New  Jersey,  boroughs  (resembling  villages  In  most 
States)  are  ordinarily  Incorporated,  or  chartered,  by  the  leg- 
islature. The  statute  gives  a  name  and  defines  the  bound- 
aries of  the  borough,  which  then  becomes  subject  to  and 
obtains  its  grant  of  powers  from  the  Borough  Law  ^^  and  the 
Act  concerning  Municipalities.^^ 

Many  jurisdictions  have  codes  or  general  statutes  apply- 
ing to  all  municipalities  or  all  of  a  certain  class,  such  as  all 
cities  in  New  Jersey  and  In  New  York.^^ 

In  England,  though  not  In  this  country,  a  municipal  cor- 
poration may  be  such  by  prescription — that  Is,  its  corporate 
powers  have  been  exercised  so  long  that  a  charter  Is  supposed 
to  exist  and  it  is  assumed  that  it  has  been  lost.  Defacto 
corporations  result  when  proceedings  to  incorporate  under  a 
general  law  have  been  defective.  The  State  only  can  attack 
the  validity  of  such  incorporation. 

To    sum   up,    we    find    that   municipal    corporations    are 
created  or  come  Into  existence  by: 
Special  charter  or 
Incorporation  under  general  laws; 

•p.  L.  1915,  p.  353. 

"Cons.  Laws,  Chap.  64. 

"P.  L.  1897,  p.  285. 

"P.  L.  1917,  p.  319. 

"P.  L.  1917,  p.  319;  Cons.  Laws,  Chap.  21,  53. 


MUNICIPAL  CORPORATIONS  21 

Prescription;  and,  through  a  failure  properly  to  In- 
corporate, a 
Defacto  municipal  corporation. 
Powers  and  functions  of  municipal  corporations. — A 
municipal  corporation  possesses  and  can  exercise  the  follow- 
ing powers  and  no  others.  First,  those  granted  in  express 
words;  second,  those  necessarily  or  fairly  Implied  in  or  Inci- 
dent to  the  powers  expressly  granted;  third,  those  essential 
to  the  accomplishment  of  the  declared  objects  and  purposes 
of  the  corporation — not  simply  convenient,  but  Indispensable. 
Any  fair,  reasonable,  substantial  doubt  concerning  the  exist- 
ence of  power  is  resolved  against  the  corporation,  and  the 
power  is  denied.  These  principles  are  of  transcendent  impor- 
tance and  lie  at  the  foundation  of  the  law  of  municipal  cor- 
porations. An  essential  power  would  seem  to  be  implied,  if 
not  expressly  granted,  so  we  may  say  that  the  powers  of  a 
municipal  corporation  are : 

(a)  Express — as  the  power  to  govern  through  specified 
officers  and  agents,  and 

(b)  Implied — as  the  power  to  acquire  a  city  hall  or 
place  to  house  such  officers  and  agents  must  be.  If  not  ex- 
pressly granted. 

Within  the  scope  of  our  topic,  v/e  may  Illustrate  by  say- 
ing that  the  power  to  construct  or  acquire  a  water  system  Is 
(almost  always  as  to  cities)  expressly  granted,  and  to  pay  for 
such  system  the  power  to  borrow  money  may  be  Implied,  if 
not  expressly  granted.  We  will  find  later  that  power  to  bor- 
row, whether  expressed  or  Implied,  does  not,  according  to  the 
weight  of  authority,  carry  with  it  the  power  to  issue  or  "emit" 
negotiable  instruments,  which,  as  we  have  seen,  possess  cer- 
tain very  interesting  characteristics. 

The  essential  branches  of  the  power  of  the  State  which 
may  be  expressly  granted  by  legislation  to  the  municipality 
are : 

( 1 )  The  police  power,  which  does  not  mean  alone  the 
power  of  uniformed  policemen  but  includes  the  right  to  make 
regulations  necessary  to  the  health,  safety,  welfare  and  com- 
fort of  the  community; 

(2)  The  power  of  taxation,  with  which  we  are  directly 
concerned  and  which  need  not  be  further  defined  at  this  time; 
and 

(3)  The  power  of  eminent  domain,  which  in  brief  means 


22  MUNICIPAL  BONDS 

the  right  (by  appropriate  legal  proceedings)  to  take  private 
property  such  as  land,  for  pubhc  purposes  such  as  parks, 
upon  making  proper  compensation  to  the  owner. 

Many  if  not  all  of  such  powers  may  be  exercised  by  a 
municipal  corporation  in  one  of  two  different  capacities, 
that  is 

(a)  Governmental,  legislative  or  public,  or 

(b)  Proprietary  or  private. 

The  distinction  is  not  easy  to  define  and  it  will  answer  our 
purpose  to  say  that  governmental  powers  are  political,  to  be 
exercised  for  the  public  good  on  behalf  of  the  State,  such  as 
the  power  to  maintain  order  and  the  public  peace;  and  that 
proprietary  powers  are  similar  to  those  exercised  by  a  busi- 
ness corporation  over  its  property,  such  as  the  right  to  collect 
payment  for  water  sold  consumers,  or  to  operate  any  public 
utility. 

Classification. — The  term  municipal  corporation  is  general 
and  is  not  always  accurately  applied.  The  legislature  may 
call  a  county  a  municipal  corporation  as  in  New  York  ^*  or 
a  "body  politic  and  corporate"  as  In  New  Jersey. ^^  Gen- 
erally speaking,  we  mean  all  municipal  or  quasi  municipal 
bodies,  or  even  school  or  taxing  districts.  These  have  various 
names,  broadly  and  usually  not  accurately  descriptive  of  their 
functions : 

(a)  Counties  are  in  a  class  by  themselves  as  they  are 
In  reality  major  political  subdivisions  of  the  State.  They  are 
not  in  all  States  corporations,  but  the  distinction  between  them 
and  municipal  corporations  Is  mainly  of  governmental  and 
historical  significance. 

(b)  True  municipal  corporations,  possessing  In  greater 
or  lesser  degree  all  the  functions  of  local  government  and  all 
the  attributes  of  municipal  corporations,  are: 

Cities,  and  sometimes 
Towns, 
•  Townships, 
Villages  and 
Boroughs. 

(c)  Quasi  municipal  corporations,  best  described  as 
local  taxing  districts  with  administrative  powers  presumably 
adequate  for  the  purpose  for  which  they  are  created,  are : 

"  Cons.  Laws,  Chap.  24. 

"An  Act  concerning  counties,  P.  L.  1918,  p.  567, 


MUNICIPAL  CORPORATIONS  23 

School  districts. 

Road,  sewer,  fire,  etc.,  districts. 

Drainage,  irrigation  or  levee  districts. 
Frequently,  if  not  always,  the  districts  classified  as  quasi 
municipal  corporations  are  co-extensive  or  practically  so,  or 
are  included  within  true  municipal  corporations.  A  city  may 
be  and  frequently  is  a  school  district  and  in  it,  overlapping 
each  other,  may  be  park,  sewer  and  other  taxing  areas,  or 
quasi  municipal  corporations.  The  consequences  of  this  over- 
lapping will  be  considered  hereafter. 

The  distinction  between  municipalities  is  of  importance 
in  determining  the  valuation  of  securities,  and  is  considered 
further  in  other  chapters. 


Chapter  IV 
MUNICIPAL    PROPERTY    AND    IMPROVEMENTS 

The  history  of  the  human  race  is  the  history  of  its  cities. 
— Earliest  recorded  history  is  not  only  an  account  of  wars 
and  conquests;  it  is  a  record  of  co-operative  undertakings. 
When  we  contemplate  the  pyramids  and  temples  of  Egypt, 
we  are  lost  in  admiration  of  their  extent  and  magnificence 
and  the  human  endeavor  necessary  to  create  such  works.  Our 
admiration  may  be  qualified  by  a  knowledge  that  the  work- 
men were  slaves  and  that  the  money  was  wrung  from  a  peas- 
antry by  absolute  monarchs.  Yet  there  is  a  co-operation 
discernible,  even  if  enforced. 

We  think  of  the  Romans  as  road  builders.  Wherever 
Roman  civilization  extended,  the  paved  causeway  led  from 
Rome  to  the  outposts  of  that  civilization.  Bridges  were  nec- 
essary incidents.  It  is  an  interesting  comment  in  passing  that 
the  spiritual  head  of  the  visible  church  takes  one  of  his  titles 
from  the  historic  function  of  bridge  building.  The  Pontifex 
Maximus  was  an  important  ofl'icial  of  Ancient  Rome  and  the 
Popes  have  succeeded  to  that  title. 

Hebrew  history  recalls  the  common  endeavor  headed  by 
Sanballat  to  rebuild  the  shattered  walls  of  Jerusalem  after 
the  captivity.  There  is,  however,  no  evidence  that  the  Jewish 
money  lenders  dealt  in  municipal  bonds  issued  to  provide 
funds  for  the  purpose. 

As  civilization  advanced,  as  human  beings  congregated, 
pure  and  plentiful  water  was  found  to  be  a  necessity.  Thence 
arose  great  systems  of  aqueducts.  One  with  which  we  are 
all  familiar,  under  the  name  of  the  Pont  du  Garde,  crosses 
the  Pontine  Marshes  to  Rome.  The  great  sewer  supplement- 
ing the  Tiber,  known  as  the  Cloaca  Maxima,  and  the  public 
baths,  objects  of  daily  resort  of  the  aristocrat  as  well  as  the 
plebeian,  still  remain  the  wonder  of  the  tourist. 

With  the  spread  of  Christianity,  necessarily  came  the 
thought  of  responsibility  for  others.     Hence  arose,  growing 

24 


MUNICIPAL  PROPERTY  AND  IMPROVEMENTS  25 

out  of  the  monastic  institutions,  hospitals  for  the  sick  and 
asylums  for  the  mentally  and  physically  Incompetent. 

It  Is  interesting  (though  not  Important)  to  observe  that 
what  the  Individual  once  did  for  himself,  the  municipality  Is 
now  doing  for  him.  The  nearest  lake  or  river  provided  a 
bathing  place  for  primitive  man.  The  Romans  understood 
the  necessity  for  public  baths  and  provided  them.  After  a 
hiatus  in  personal  cleanliness  for  many  centuries,  the  modern 
city  erects  public  baths,  and  every  residence  is  provided  with 
more  or  less  adequate  facilities  for  bathing.  Co-operation 
makes  possible  any  number  of  things  which  the  unaided  indi- 
vidual would  have  difficulty  in  obtaining.  So  the  public  de- 
mand for  Improvements  is  each  year  carrying  our  munici- 
palities farther  along  the  road  to  socialism. 

Municipal  expenditures, — A  municipality  may  expend  its 
money  only  for  a  public  purpose.  What  Is  a  public  purpose 
may  not  always  be  easy  to  determine  but  when  determined  It 
constitutes  the  limits  of  the  power  of  taxation.  The  State 
legislature  can  neither  compel  nor  authorize  a  municipal  cor- 
poration to  expend  any  of  its  funds  for  a  private  purpose  and 
consequently,  since  practically  every  undertaking  of  a  mu- 
nicipality does  or  may  require  the  expenditure  of  money,  a 
municipal  corporation  cannot,  even  with  express  legislative 
sanction,  embark  on  any  private  enterprise  or  assume  any 
function  which  is  not  public  In  a  legal  sense.  If  a  specific 
provision  prohibiting  the  expenditure  of  public  funds  for 
private  purposes  is  required,  it  Is  found  in  the  clauses  of  most 
State  constitutions  which  forbid  the  taking  of  property  for 
other  than  public  uses;  for  since  the  funds  of  a  municipality  are 
necessarily  directly  or  Indirectly  raised  by  taxation,  the  expendi- 
ture of  money  by  a  municipality  for  private  purposes  does  or 
may  necessarily  result  in  the  taking  of  property  under  the  guise 
of  taxation  for  other  than  public  uses.  It  can  make  no  dif- 
ference that  the  payment  is  to  be  made  out  of  borrowed 
money  and  that  no  Immediate  provision  for  taxation  Is  made. 

But  the  power  of  a  municipality  under  legislative  authority 
to  expend  funds  raised  by  taxation  upon  public  institutions, 
such  as  hospitals  and  schools  which  are  owned,  operated  and 
controlled  by  the  municipality,  is  unquestioned.  Subject  to 
constitutional  restrictions.  It  is  within  the  power  of  the  legis- 
lature of  a  State  to  ascertain  how  the  public  burdens  are  to 
be  borne. 


26  MUNICIPAL  BONDS 

As  to  what  constitutes  a  public  or  municipal  purpose  (the 
terms  are  not  necessarily  synonymous)  the  decisions  of  the 
courts  and  the  statutes  are  not  uniform.  It  must,  however, 
be  for  the  benefit  and  use  of  the  municipality  Itself.  More 
specifically  It  has  been  said  that  a  municipal  purpose  must 
concern  primarily  the  benefit,  use,  or  convenience  of  a  munici- 
pality as  distinguished  from  that  of  the  public  outside  of  It, 
and  that  It  must  be  within  the  ordinary  range  of  municipal 
action.^ 

Municipal  expenditures  are  of  two  kinds:  first,  for  run- 
ning expenses;  and  second,  for  capital  expenditures. 

Running  expenses. — By  running  expenses  Is  meant  expen- 
ditures for  salaries,  maintenance  of  property,  cleaning  streets, 
and  the  numerous  duties  which  must  continually  be  performed 
to  keep  the  city  moving. 

Capital  expenditures. — When  property  Is  to  be  acquired, 
or  a  building  constructed,  the  expenditure  of  money  Is  a  capi- 
tal expense.  The  entire  cost  of  such  a  project  can  be  met 
with  money  raised  by  taxation  In  one  or  more  years.  But  It 
Is  advisable.  If  the  amount  of  money  needed  be  large,  to 
spread  the  expense  over  a  period  of  years.  Therefore,  the 
funds  to  pay  for  property  acquired  for  public  purposes  or 
public  Improvements  are  frequently  borrowed.  This  may  be 
necessary  because  the  amount  required  Is  too  great  to  be 
Included  In  the  annual  budget  and  raised  by  tax  In  one  year. 
A  municipality  whose  annual  running  expenses  are  half  a 
million  dollars  may,  and  frequently  does,  construct  a  water 
or  sewer  system  costing  four  or  five  times  that  amount.  The 
effect  upon  the  tax  rate  If  the  larger  sum  should  be  Included 
In  the  budget  can  be  Imagined  and  has  been  explained  in 
Chapter  I.  As  we  have  seen,  when  money  Is  borrowed  for  a 
capital  expenditure.  It  Is  secured  by  the  Issue  and  sale  of 
bonds. 

Debt  service. — Because  of  Its  Importance,  the  author  sug- 
gests debt  service  as  a  third  division  In  the  classification  of 
municipal  expenditures.  By  debt  service,  and  It  Is  a  term  we 
will  frequently  use,  we  mean  the  amount  of  money  necessary 
each  year  to  pay  the  Interest  on  the  public  debt  and  to  provide 
a  fund  for  Its  redemption.  This  latter  is  usually  the  contri- 
bution to  the  sinking  fund,  but  modern  financing  requires  that 
funded  debt  be  paid  In  annual  installments,  and  in  the  debt 

*/n  re  Mayor,  etc.  (1885),  99  N.  Y.,  569  at  590. 


MUNICIPAL  PROPERTY  AND  IMPROVEMENTS  27 

service  must  be  included  the  amount  necessary  to  retire  ma- 
turing obligations. 

All  municipal  expenditures  are  made  by  the  municipality 
in  one  of  its  two  capacities,  governmental  or  proprietary,  but 
the  distinction  is  not  important  in  this  discussion. 

Acquisition  of  property. — By  the  immemorial  usage  of  the 
country,  it  appears  to  be  recognized  that  as  an  incident  to  the 
corporate  powers  of  municipal  corporations,  they  may  pur- 
chase and  hold  property  both  real  and  personal.  So  also  a 
municipal  corporation  has  implied  power  to  receive  a  gift  of 
real  estate  for  corporate  purposes.  As  all  corporations  in 
this  country  are  created  by  the  legislature,  they  have  only 
such  powers  as  the  legislature  expressly  confers  and  such  as 
are  necessarily  or  fairly  incident  thereto. 

The  same  doctrine  applies  to  and  measures  the  corporate 
capacity  to  receive  all  property.  In  the  absence  of  express 
prohibitory  statutes  which  in  terms  confer  and  limit,  and 
.therefore  define  and  measure  the  power,  the  capacity  to  ac- 
quire and  hold  property  (real  and  personal)  must  be  fairly 
incidental  to  some  power  expressly  granted  and  absolutely 
indispensable  to  the  declared  purposes  of  the  corporation. 
Any  greater  right  than  this  is  not  only  not  granted  but  is 
impliedly  denied.- 

Sound  as  these  observations  are,  the  principle  is  not  always 
practically  important  because  in  many  jurisdictions  statutory 
grants  of  power  are  so  large  and  so  all-embracing  that  there  is 
practically  no  limit  to  the  power  to  acquire  and  hold  property 
and  construct  improvements,  except  that  the  exercise  of  such 
power  must  be  for  a  public  purpose;  and  the  courts  are  gradu- 
ally extending  the  meaning  of  "public  purposes." 

Methods  of  acquisition. — A  municipal  corporation  ac- 
quires its  property  by  purchase,  by  gift  and  by  condemnation. 
These  powers  are  usually  conferred  by  express  statute,  that 
is  either  contained  in  the  charter  or  exists  in  some  enactment 
applicable  to  all  municipalities  of  a  certain  class. 

Purchase  and  gift  need  no  explanation. 

The  power  to  condemn  is  the  right  to  take  private  prop- 
erty on  making  to  the  owner  compensation  in  the  prescribed 
amount,  for  a  designated  municipal  or  public  purpose. 

Limitations. — There  are  limitations  on  the  exercise  of  such 
grants  of  power,  besides  the  limitation  that  the  power  must 

'Dillon,  p.  1556. 


28  MUNICIPAL  BONDS 

be  exercised  for  public  purposes.  It  is  frequently  required 
by  statute  that  before  a  certain  thing  be  done,  the  question  of 
doing  it  must  be  submitted  to  a  popular  vote,  or  that  if  by 
ordinance  or  resolution  the  thing  is  directed  to  be  done,  a 
certain  number  of  taxpaying  electors  may  require  a  referen- 
dum. These  limitations,  however,  are  not  so  much  limita- 
tions on  the  power  as  on  the  right  to  exercise  or  method  of 
exercising  the  power. 

Public  Improvements. — The  power  of  a  municipality  to 
undertake  public  improvements  is  subject  to  the  same  qualifi- 
cations as  its  power  to  acquire  public  property.  Its  power  to 
expend  funds  raised  by  taxation  for  works  of  internal  im- 
provement that  are  located  within  its  limits  and  constructed 
and  controlled  by  its  own  officials  is  unquestioned.  It  may 
expend  its  funds  in  works  of  external  improvement,  if  of  a 
public  character,  and  subject  to  legislative  regulation  and 
control. 

Statutory  powers  (Act  concerning  Municipalities  in  New 
Jersey). — The  statutory  powers  of  municipal  corporations 
have  been  so  greatly  enlarged  during  the  last  few  years,  espe- 
cially in  New  Jersey  and  to  a  hardly  less  extent  in  New  York, 
that  a  discussion  of  general  principles  is  a  discussion  of  par- 
ticular statutes.  One  of  the  best  examples  of  such  statutory 
grants  is  the  Act  concerning  Municipalities  in  New  Jersey.^ 

There  is  no  power  to  acquire  property  or  construct  im- 
provements which  a  municipality  in  New  Jersey  ought  prop- 
erly to  have  that  is  not  granted  by  this  statute.  It  is  one  of 
the  best  examples  of  codification  and  one  of  the  best  drafted 
statutes  which  we  have,  both  in  form  and  content.  It  must 
be  read,  as  to  the  creation  of  funded  debt,  in  connection  with 
what  is  called  the  Pierson  Bond  Act.^  Given  the  power  to 
construct  or  acquire  property  or  improvements  by  the  Act 
Concerning  Municipalities,  the  power  to  issue  bonds  is  con- 
ferred by  the  Pierson  Act. 

Second  Class  Cities  Law  in  New  York. — In  New  York  a 
good  example  is  the  Second  Class  Cities  Law  which  gives 
such  cities  the  right  to  create  a  funded  debt  for  any  municipal 
purpose,  but  it  leaves  to  other  statutes  and  to  some  extent  to 
general  principles  the  determination  of  the  question,  "What 
is  a  municipal  purpose?"     The  Village  Law  is  an  example  of 

•p.  L.  1917,  Chap.  152. 
*P.  L.  1917,  Chap.  240, 


MUNICIPAL  PROPERTY  AND  IMPROVEMENTS  29 

a  statute  giving  somewhat  limited  powers  and  attempting  to 
grant  only  such  powers  as  should  be  exercised  by  a  municipal 
corporation  of  that  particular  class. 

General  rights  of  municipalities. — In  general,  municipal- 
ities have  the  right  to  construct  public  buildings  even  without 
express  legislative  authority  and  to  provide  a  meeting  place 
for  the  voters  of  the  municipality  if  it  is  a  pure  democracy, 
such  as  a  New  England  town,  or  for  the  municipal  council 
if  It  has  a  representative  form  of  government;  In  other  words, 
it  has  the  right  to  build  a  city  or  town  hall.  Express  legisla- 
tive authority  Is,  however,  ordinarily  found. 

Municipalities  almost  invariably  are  granted  the  power 
of  extending,  improving,  and  grading  streets  and  highways 
within  their  respective  limits.  It  has  been  held  that  power 
to  grade  and  Improve  its  streets  Is  an  inherent  corporate 
power.  The  construction  of  sewers  and  drains  Is  a  public 
and  governmental  function,  and  a  municipal  corporation  may 
be  required  by  the  legislature  to  pay  the  cost  of  a  sewerage 
system  constructed  without  its  consent. 

A  water  supply  is,  of  course,  the  most  important  requisite 
in  a  community  of  any  size.  The  power  of  a  municipal  cor- 
poration, with  legislative  authority,  to  engage  In  the  sale  and 
distribution  to  its  Inhabitants  for  compensation,  of  a  com- 
modity which  Is  essential  to  wholesome,  comfortable  and  con- 
venient living  Is  well  established,  even  if  the  business  which 
Is  undertaken  is  one  which  can  be,  and  ordinarily  is,  carried 
on  by  private  capital.  If  It  is  an  undertaking  which  cannot  be 
carried  on  without  the  aid  of  some  governmental  franchise, 
such  as  the  right  of  eminent  domain,  or  the  privilege  of  using 
the  public  streets  for  pipes  and  conduits,  the  appropriation  of 
real  estate  for  a  water  works  may  be  authorized.  In  passing, 
we  note  that  while  there  Is  no  other  distinction  between  water 
works  operated  by  gravity  and  water  works  requiring  pump- 
ing, the  practical  difference  is  Important  because  of  the  small 
cost  of  operation  of  the  former  and  the  greater  cost  of  opera- 
tion of  the  latter. 

Other  activities. — Municipalities  may  acquire  and  main- 
tain public  lighting  plants  and  engage  in  the  business  of  sup- 
plying light  and  electricity.  They  may  be  expressly  author- 
ized by  statute  to  erect  public  wharves  and  charge  tolls  for 
their  use.  The  acquisition  of  parks  and  public  places  has  long 
been  recognized  as  a  municipal  function.     Markets  may  be 


30  MUNICIPAL  BONDS 

acquired  and  constructed,  and  libraries  built  and  operated  but 
in  this  latter  case  the  statutory  power  must  be  closely  scanned. 

While  education  is  a  function  of  the  State  and  is  generally 
recognized  as  such,  the  State,  through  the  legislature,  may 
impose  upon  the  municipality  the  burden  of  constructing, 
operating  and  maintaining  schools.  It  is  to  some  extent  the 
result  of  this  theory  that  our  public  educational  system  is  as 
good  as  it  is,  but  out  of  the  theory  rises  the  extremely  complex 
economic  and  political  situation  which  we  see  illustrated  by 
controversies  between  bodies  with  budget-making  powers  and 
boards  of  education. 

Municipalities  may  make  improvements  and  expend  their 
funds  for  works  of  a  public  character  even  if  these  works  are 
not  wholly  within  the  territorial  limits  of  the  municipality, 
provided  they  are  connected  with  municipal  improvements. 

A  city  may  be  granted  power  to  expend  its  funds  in 
improving  the  navigation  of  a  river  upon  which  the  munici- 
pality is  situated,  and  we  are  familiar  with  the  fact  that  the 
water  supply  of  the  City  of  New  York  extends  northward 
through  many  cities  and  suburban  communities  to  points 
geographically  far  removed  from  the  city  hall.  There  can  be 
no  doubt  of  the  power  of  the  legislature  to  authorize  a  munici- 
pal corporation  to  acquire  the  ownership  of  property  outside 
its  territorial  limits,  but  this  power  must  be  expressly  granted. 

Public  utilities. — The  ownership  and  operation  of  public 
utilities  is  a  large  subject  upon  which  we  need  spend  little 
time.  It  may  be  and  frequently  is  a  political  issue.  It  should 
be  noted  that  there  is  an  important  distinction  between  public 
ownership  and  public  operation  but  in  either  event  the  power 
must  come  from  the  legislature  and  be  clearly  granted  in 
express  terms. 

Railroad  aid  as  such  is  now  fortunately  forbidden  by 
constitution  and  by  statute,  the  enactment  of  such  prohibi- 
tions resulting  in  most  States  from  the  abuses  which  occurred 
in  the  days  of  development  and  expansion  following  the  Civil 
War.  The  power  to  own  and  operate  street  railroads  is  fre- 
quently given;  for  an  illustration  see  the  New  Jersey  Act 
concerning  Municipalities.  The  exercise  of  such  power  is 
ordinarily  made  dependent  upon  a  referendum  of  the  tax- 
paying  electors. 

Sale  of  commodities.— It  does  not  often  happen  that  mu- 
nicipalities desire  to  function  as  retail  merchants  but  we  all 


MUNICIPAL  PROPERTY  AND  IMPROVEMENTS  31 

recall  extensive  operations  of  this  character  during  the  Great 
War.  Most  of  such  enterprises,  namely  the  sale  of  govern- 
ment food  products  for  the  purpose  of  keeping  down  retail 
prices,  were  probably  without  authority  of  law,  unless  in  some 
States  statutes  were  hurriedly  passed  to  permit  the  use  of 
public  places  and  public  funds,  and  the  participation  of  public 
officials.  Most  authorities  agree  that  a  municipal  corporation 
cannot  constitutionally  be  authorized  by  the  legislature  to 
engage  in  the  business  of  selling  and  distributing  the  conven- 
iences or  even  the  necessities  of  life  if  the  business  is  of  such 
a  nature  that  it  can  be  carried  on  by  private  individuals  with- 
out the  aid  of  any  franchises  from  the  State. ^ 

Building  houses. — The  housing  situation  existing  in  the 
years  1919  and  1920  in  the  Eastern  States  created  a  demand 
that  municipalities  engage  in  the  business  of  building  houses. 
This,  it  is  safe  to  say,  they  cannot  do  without  express  legis- 
lative authority  and  it  is  very  questionable  whether  such  leg- 
islative authority  can  constitutionally  be  given. 

In  conclusion  we  may  say :  While  the  right  of  a  munici- 
pality to  acquire  property  and  construct  improvements  may 
in  some  cases  be  inferred,  the  power  is  ordinarily  given  by 
express  grant  from  the  legislature.  When  the  purpose  for 
which  a  bond  is  issued  appears  to  be  unusual,  for  example  to 
acquire  a  municipal  graveyard,  the  statutes  must  be  closely 
scanned.  If  the  grant  of  power  cannot  be  found,  the  infer- 
ence must  be  extremely  clear  that  such  power  exists  or  the 
doubt  must  be  resolved  against  the  existence.  Practically, 
we  find  grants  of  power  sufficient  for  proper  municipal  func- 
tions, according  to  their  kind. 

*  19  R.  C.  L.,  p.  719. 


Chapter  V 
TAXATION  AND  LIMITATION  OF  TAXES 

Municipal  bonds  redeemed  by  taxation. — Municipal 
bonds,  with  relatively  unimportant  exceptions,  are  redeemed 
with  money  raised  by  one  form  or  another  of  tax.  Taxation 
is,  therefore,  one  of  the  most  important  of  the  subjects  with 
which  we  shall  have  to  deal. 

Taxes  defined. — Taxes,  including  assessments,  are  burdens 
or  charges  imposed  either  directly  by  the  legislature,  or  under 
its  authority,  upon  persons  and  property  to  raise  money  for 
public  as  distinguished  from  private  purposes,  or  to  accomplish 
some  thing  or  object  public  in  its  nature.  A  public  use  or  pur- 
pose is  the  raison  d'etre  of  a  tax.  The  substantial  foundation 
of  the  power  is  political,  civil,  or  governmental  necessity,  and 
taxes  are  largely  if  not  wholly  sacrifices  for  the  public  good. 
A  tax  may  also  be  defined  as  an  enforced  contribution  of  money 
or  other  property,  assessed,  in  accordance  with  some  reason- 
able rule  of  apportionment,  by  authority  of  a  sovereign  State, 
on  persons  or  property  within  its  jurisdiction,  for  the  purpose 
of  defraying  the  public  expenses.  A  tax  is  an  obligation  im- 
posed upon  citizens  to  pay  the  expenses  of  government  and  is 
in  no  way  dependent  upon  the  will  or  contract — express  or 
implied — of  the  persons  taxed. 

Taxation  is  the  principal  source  of  revenue  by  which  munici- 
pal expenses  are  borne  and  debts  and  liabilities  paid.  The  pri- 
mary form  of  tax  in  almost  all  of  the  States  is  the  direct  prop- 
erty tax  levied  at  a  uniform  rate  upon  all  the  property,  real  or 
personal,  within  each  city,  town,  or  other  civil  unit  or  taxing 
district,  and  it  is  usually  intended  to  reach  all  property  taxable 
within  the  power  of  the  State. 

The  power  to  tax. — The  power  to  tax  is  inherent  in  the 
sovereign,  which  for  our  purpose  is  the  State.  The  power  of 
the  States  and  of  their  municipalities  to  levy  taxes  is  subject  to 
certain  express  and  implied  restrictions  under  the  Federal  Con- 
stitution. It  is  sufficient  to  say  that  the  only  restriction  of 
interest  is  the  provision  that  States  shall  not  pass  laws  impair- 

32 


TAXATION  AND  LIMITATION  OF  TAXES      33 

ing  the  obligation  of  contracts.  This  is  held  to  be  a  limitation 
upon  the  taxing  power  of  the  State.  The  right  to  tax  is  not 
granted  by  the  constitution  of  a  State,  but  of  necessity  underlies 
it  because  a  government  could  not  exist  or  perform  its  functions 
without  it.  While  it  may  be  regulated  and  limited  by  the  con- 
stitution, it  exists  without  express  grant  in  words,  as  a  neces- 
sary attribute  of  sovereignty.  The  provisions  of  the  State  con- 
stitutions, which  relate  to  the  power  of  taxation,  do  not  operate 
as  grants  of  the  power  of  taxation  to  the  governments  thus  set 
up  but  constitute  limitations  upon  a  power  which  would  other- 
wise be  without  limit. 

The  power  to  tax  is  exercised  by  the  legislature  either 
directly  through  the  passage  of  laws  for  the  raising  of  revenues 
for  support  of  the  commonwealth,  or  indirectly  by  delegation 
to  the  municipalities  or  local  taxing  boards.  Subject  to  con- 
stitutional restrictions,  it  is  within  the  power  of  the  legisla- 
ture of  a  State  to  ascertain  the  public  burdens  to  be  borne 
and  the  persons  or  classes  of  persons  who  ought  to  bear  them 
and  its  determination,  within  the  limits  of  the  constitution, 
is  not  judicially  reviewable.  Stated  somewhat  differently,  we 
may  say  that  the  work  of  deciding  what  money  shall  be  raised 
by  taxation  and  what  properties  or  privileges  or  occupations 
shall  be  taxed  rests  exclusively  with  the  legislature  without 
any  limitations  except  such  as  are  imposed  by  express  con- 
stitutional provisions. 

"The  power  of  taxation  being  legislative,  all  the  inci- 
dents are  within  the  control  of  the  legislature.  The  purposes 
for  which  a  tax  should  be  levied;  the  extent  of  taxation;  the 
apportionment  of  the  tax;  upon  what  property  or  class  of 
persons  the  tax  shall  operate;  whether  the  tax  shall  be  gen- 
eral or  limited  to  a  particular  locality;  and  in  the  latter  case, 
the  fixing  of  a  district  of  assessment;  the  method  of  collec- 
tion, and  whether  the  tax  shall  be  a  charge  upon  both  person 
and  property,  or  only  on  the  land,  are  matters  within  the 
discretion  of  the  legislature  and  in  respect  to  which  its  deter- 
mination is  final."  ^ 

A  municipal  corporation  established  by  the  legislature 
cannot  exercise  the  power  of  taxation  without  legislative 
authority.  This  is  subject  to  the  qualification  that  the  au- 
thority of  a  municipality  to  tax  is  sometimes  implied.  For 
example,  if  the  power  to  issue  securities  is  given  by  statute,  it 

^  Genet  v.  City  of  Brooklyn  (1885),  99  N.  Y.  296  at  306. 


34  MUNICIPAL  BONDS 

has  been  held  by  the  United  States  Supreme  Court  that  the 
power  to  tax  to  obtain  funds  to  pay  the  interest  and  principal 
of  maturing  bonds  may  be  implied.^  That  court  has  declared 
that  If  a  municipal  corporation  is  authorized  to  issue  bonds  it 
must  levy  a  tax  therefor  unless  the  power  be  plainly  and 
unmistakably  negatived  by  the  statutes  authorizing  the  bonds; 
that  is,  it  must  exist  by  unmistakable  implication.^  It  cannot 
be  collected  by  doubtful  inferences  from  other  powers  or 
powers  relating  to  other  subjects  nor  can  it  be  deduced  from 
any  consideration  of  convenience  or  advantage. 

Delegation  of  power. — The  legislative  branch  of  the  gov- 
ernment may  delegate  the  power  to  tax  to  municipal  corpora- 
tions, but  the  power  to  tax  cannot  be  delegated  except  for 
public  purposes.  In  the  absence  of  a  constitutional  restric- 
tion, the  legislature  may  confer  the  taxing  power  upon  mu- 
nicipalities in  such  measure  as  it  deems  expedient,  in  other 
words,  with  such  limitations  as  it  sees  fit  as  to  the  rate  of 
taxation,  the  public  purposes  for  which  the  taxation  Is  author- 
ized, and  the  objects  (the  persons,  business  and  property) 
which  shall  be  subject  to  taxation. 

It  is  well  settled  In  most  jurisdictions  that  the  taxing 
power  may  be  delegated  to  a  district  having  very  embryonic 
or  no  governmental  functions,  such  as  an  irrigation,  fire,  or 
sewer  district.  This  Is  true  in  most  States  but  it  is  not  true 
in  New  Jersey  because  of  the  constitutional  restriction  dis- 
cussed in  the  Passaic  Valley  Sewer  Case."* 

"Public  purpose"  the  boundary  of  taxation. — Taxes  may 
be  levied  only  for  a  public  purpose.  The  definition  of  a  pub- 
lic use  or  purpose  is  not  easy.  It  has  been  defined  in  New 
York  as  follows:  "The  terms  'public  or  municipal  purpose' 
and  'general  welfare,'  as  used  in  this  article,  shall  each  Include 
the  promotion  of  education,  art,  beauty,  charity,  amusement, 
recreation,   health,    safety,    comfort   and   convenience,"    etc.^ 

If  a  public  purpose  Is  not  always  easy  to  determine,  it 
constitutes,  when  detennined,  the  boundary  of  the  power  of 
taxation.  As  stated  above,  a  public  use  or  purpose  is  the 
essence  of  a  tax.  It  is  a  well  settled  principle  of  constitu- 
tional law  that  no  tax  can  be  levied  except  for  the  purpose 

*  Dillon,  p.  2398. 

"United  States  v.  New  Orleans  (1878),  98  U.  S.  381;  Ralls  County  v. 
United  States  (1881),  105  U.  S.  733. 

*Van  Cleve  v.  Passaic  Valley,  etc.  (1905),  71  N.  J.  L.  574;  60  Atl.  214. 
"Cons.  Laws,  Chap.  31. 


TAXATION  AND  LIMITATION  OF  TAXES       35 

of  raising  money  which  is  to  be  expended  for  the  public  use. 
To  justify  any  exercise  of  the  taxing  power,  the  expenditure 
which  it  is  intended  to  meet  must  be  for  some  public  service 
or  some  object  which  concerns  the  public  welfare.  This  prin- 
ciple is  fundamental  and  underlies  all  government  that  is 
based  on  reason  rather  than  force. 

It  is  said  that  levying  a  tax  for  a  purpose  not  public  is  most 
obviously  objectionable  as  it  is  taking  the  property  of  the  per- 
son assessed  without  due  process  of  law.  Since  such  a  burden 
is  not  a  tax,  to  impose  it  is  a  mere  spoliation  of  the  individual 
without  the  sanction  of  any  of  the  precedents  which  constitute 
due  process  of  law.  The  application  of  the  principle  that  taxes 
can  be  levied  only  for  the  public  use  extends  far  beyond  the 
mere  denial  of  the  right  to  collect  a  tax  which  has  been  levied 
for  a  private  purpose.  The  right  to  tax  depends  upon  the  ulti- 
mate use,  purpose  and  object  for  which  the  fund  is  raised. 
This  principle  may  accordingly  be  invoked  by  a  taxpayer  to 
prevent  the  expenditure  of  funds  which  have  been  or  are  to 
be  raised  by  taxation  for  purposes  not  public  and  is  a  weapon 
which  may  be  used  to  advantage. 

If  taxes  cannot  be  imposed  for  a  certain  purpose,  money 
already  in  the  treasury  cannot  be  appropriated  for  that  pur- 
pose, and  if  taxes  cannot  be  levied,  bonds  cannot  ordinarily 
be  issued. 

A  test  of  the  right  of  taxation. — Perhaps  the  best  test  of 
the  right  of  taxation  is  to  ask  whether  the  proceeds  of  the  tax 
are  to  be  used  for  the  support  of  government  or  for  some  of 
the  recognized  objects  of  government,  or  directly  to  promote 
the  welfare  of  the  community.  A  purpose  from  the  attain- 
ment of  which  will  flow  some  benefit  or  convenience  to  the 
public  is  a  public  use.'' 

Classification  of  taxes. — Taxes  have  been  classified  by  text 
writers  as  follows : 

(a)  Capitation  or  poll. 

(b)  Property,  in  which  are  included  general  taxes  and 
assessments. 

(c)  Excise. 

(d)  Income. 

Poll  taxes. — A  capitation  or  poll  tax  is  one  of  a  fixed 
amount  operating  upon  all  persons,  or  all  persons  of  a  certain 
class,  resident  within  a  specified  territory,  without  regard  to 

•  26  R.  C.  L.,  p.  46. 


36  MUNICIPAL  BONDS 

their   property    or   the    occupation   in    which    they   may   be 
engaged. 

Property  tax. — A  property  tax  is  the  form  most  familiar 
to  us  and  is  ordinarily  reckoned  on  the  amount  of  property 
owned  by  the  taxpayer  on  a  given  day  and  not  on  the  total 
amount  owned  by  him  during  the  year,  and  it  is  ordinarily 
assessed  at  stated  periods  determined  in  advance  and  collected 
at  appointed  times.  A  tax  computed  upon  the  valuation  of 
property,  such  as  the  value  of  one's  dwelling,  is  considered 
a  property  tax. 

A  general  property  tax  is  laid  on  all  the  property,  or  all 
the  property  of  a  certain  class,  located  within  a  specified  ter- 
ritory, for  the  purpose  of  defraying  the  public  expenses  of 
that  territory.  Such  a  tax  is  based  upon  the  theory  that  a 
certain  amount  of  money  must  be  raised  to  maintain  the 
municipal  government. 

A  special  assessment,  on  the  other  hand,  is  laid  upon 
property  specially  benefited  by  a  local  improvement  in  pro- 
portion to  the  benefit,  for  the  purpose  of  defraying  the  cost 
of  the  improvement.  It  proceeds  upon  the  theory  that  when 
a  local  improvement  enhances  the  value  of  neighbouring  prop- 
erty, it  is  reasonable  and  just  for  the  legislature  to  provide 
that  such  property  shall  pay  for  the  improvement.  In  a  gen- 
eral levy  of  taxes,  the  contribution  is  exacted  in  return  for 
the  general  benefits  of  government;  in  special  assessments, 
the  contribution  is  exacted  because  the  property  of  a  taxpayer 
is  considered  by  the  legislature  to  be  benefited  over  and 
beyond  the  general  benefit  to  the  community.  We  find  spe- 
cial assessments  frequently  levied  for  such  improvements  as 
grading  and  paving  streets  and  sidewalks,  constructing  drains, 
sewers,  and  the  like. 

Excises. — An  excise  has  come  to  mean  every  form  of  taxa- 
tion which  is  not  a  burden  laid  directly  upon  persons  or  prop- 
erty, including  every  form  or  charge  imposed  by  public 
authority  for  the  purpose  of  raising  revenue,  upon  the  per- 
formance of  an  act,  the  enjoyment  of  a  privilege,  or  the  en- 
gaging in  an  occupation.^  A  chauffeur's  license  fee  is  a  fa- 
miliar illustration,  as  it  is  imposed  directly  by  the  legislature 
without  assessment. 

Income  taxes. — Income  taxes  are  of  importance  to  the 
investor,   as  we  shall  see  later,  but  only  as  to  the  income 

'26  R.  C.  L.,  p.  34. 


TAXATION  AND  LIMITATION  OF  TAXES       37 

derived  therefrom  and  not  as  supporting  the  bonds. ^  As 
municipal  bonds  are  not  supported  by  income  taxes,  except  in 
States  which  apportion  and  return  to  the  municipality  a  part 
of  the  tax  raised  within  it,  in  which  cases  the  support  is  indi- 
rect, nothing  further  need  be  said  at  this  point. 

Debt  service. — The  interest  on  bonds  and  the  money  to 
pay  the  maturing  installments  of  principal,  or  to  provide  the 
annual  contributions  to  a  sinking  fund,  Is  raised  by  tax  and 
is  called  "debt  service."  Such  tax  should  be  a  direct,  ad 
valorem,  real  property  tax,  for  no  other  form  of  taxation  is 
sufficient  protection  for  the  bondholder.  The  reason  for  this 
is  that  the  principal  source  of  revenue  of  all  civil  divisions  is 
such  a  tax  on  real  property.  Assessed  valuations  of  real  prop- 
erty tend  to  increase  from  year  to  year  and  not  to  decrease 
or  fluctuate.  A  marked  decrease  in  valuations  may  be  a 
danger  signal,  and  its  cause  should  be  investigated.  The 
amount  of  a  direct  real  property  tax  can  be  quite  accurately 
estimated  in  advance,  as  can  the  amount  or  percentage  of  the 
tax  which  will  be  collected.  The  amount  of  tax  which  can 
be  collected  from  personal  property,  or  derived  from  income 
or  poll  taxes,  tends  to  fluctuate,  is  small  in  amount  as  com- 
pared with  the  real  property  tax,  and  is  not  a  dependable 
source  of  municipal  income. 

Taxation  clause  generally  provides  for  payment  of  princi- 
pal and  interest. — Most  statutes  authorizing  the  issue  of 
bonds  by  municipalities  provide  for  the  raising  by  taxation  of 
sufficient  funds  to  pay  the  principal  and  annual  interest  on  the 
bonds.  In  New  York,  for  example,  the  General  Municipal 
Law  ^  provides  that  every  ordinance  or  resolution  providing 
for  the  issue  of  bonds  shall  provide  for  a  sufficient  tax  to  pay 
the  interest  and  maturing  principal.  In  New  Jersey,  the  Pier- 
son  Budget  Act  ^°  in  section  12,  sub-division  f,  makes  it  man- 
datory upon  the  municipality,  county,  or  school  district,  to 
include  within  the  budget  appropriations  for  the  year  a  suf- 
ficient amount  to  meet  sinking  fund  requirements  and  to  pay 
bonds  falling  due  within  such  year — which  amount,  of  course, 
includes  requirements  for  interest.  It  may  be  said  that  very 
few  statutes  which  authorize  the  issue  of  bonds  fail  to  pro- 
vide for  a  sufficient  tax,  and  that  where  specific  provision  is 

*  Chapter  on  Taxation  of  Bonds. 
'  Cons.  Laws,  Chap.  ?4. 
"P.  L.  1917,  p.  548. 

-*^(Cb  .1  4  0 


38  MUNICIPAL  BONDS 

not  made  in  the  statute  itself,  adequate  provision  is  usually 
made  by  general  laws.     There  are,  however,  exceptions. 

Taxation  provisions  important  to  bondholder. — The 
bondholder  must  consider  to  what  extent  the  statutes  have 
conferred  upon  or  denied  to  the  municipality  the  general 
powers  of  taxation;  for  the  courts  are  powerless  to  grant  a 
remedy  when  the  laws  fail  to  provide  for  a  sufficient  levy  or 
when  taxation  is  restricted  to  such  an  extent  as  to  make  it 
insufficient.  The  courts  have  not  the  power  to  levy  or  collect 
taxes  but  may  simply  issue  writs  for  the  performance  of  these 
duties  and  coerce  the  proper  officials  when  they  exist  and  are 
to  be  found. ^^  The  extent  to  which  the  taxing  power  must 
be  and  the  extent  to  which  it  may  be  exercised  are  most  im- 
portant considerations  in  purchasing  municipal  bonds. ^"  It 
is  well,  therefore,  to  know  that  bonds  are  supported  by  the 
full  taxing  power  of  the  municipality  without  limitations  or 
restrictions. 

Limitation  on  taxes. — In  New  York  State,  there  is  no 
limit  upon  the  tax  for  debt  service.  The  constitution  con- 
tains the  following  limitation:  ^^  "The  amount  hereafter  to 
be  raised  by  tax  for  county  or  State  purposes,  in  any  county 
containing  a  city  of  over  one  hundred  thousand  inhabitants, 
or  in  any  such  city  of  this  State,  in  addition  to  providing  for 
the  principal  and  interest  of  existing  debt,  shall  not  in  the 
aggregate  exceed  in  any  one  year  two  per  centum  of  the 
assessed  valuation  of  the  real  and  personal  estate  of  such 
county  or  city,  to  be  ascertained  as  prescribed  in  this  section 
in  respect  to  county  or  city  debt."  The  clause  "in  addition 
to  providing  for  the  principal  and  interest  of  existing  debt" 
is  regarded  as  constantly  in  force  and  to  relate  to  new  debt 
as  well  as  old  debt.  While  there  is  a  limitation  on  taxation 
for  general  purposes  in  cities  of  over  one  hundred  thousand 
inhabitants,  the  limitation  does  not  apply  to  debt  service. 
There  is  no  statutory  limitation  in  New  York  on  taxes  for 
debt  service.  In  New  Jersey,  there  is  no  constitutional  or 
statutory  limitation  on  taxation  for  debt  service. 

The  Smith  One  Per  Cent  Law. — In  many  other  States,  we 
find  limitations  on  taxation  for  debt  service,  as  in  Ohio,  con- 
tained in  what  is  known  as  the  Smith  One  Per  Cent  Law. 

"Chamberlain,  p.  189. 
"Chamberlain,  p.  187. 
"Art.  VIII,  Sec.  10. 


TAXATION  AND  LIMITATION  OF  TAXES       39 

(Code:  §5649.)  Such  limitations  on  taxation  for  the  pay- 
ment of  funded  debt  in  that  State  have  been  modified  by  the 
new  Ohio  Bond  Law,  effective  January  1,  1922. 

In  an  article  by  Raymond  C.  Atkinson  of  Western  Re- 
serve University,  entitled:  "The  Effects  of  Tax  Limitation  in 
Ohio  Cities,"  printed  in  the  National  Municipal  Rcvieiv  for 
December,  1920,  there  is  a  very  concise  and  illuminating  dis- 
cussion of  the  effect  of  the  Smith  One  Per  Cent  Law.  It  is 
interesting  to  note  that  the  supreme  court  of  Ohio  in  1916, 
according  to  Prof.  Atkinson,  "definitely  declared  that  full 
provision  for  interest  and  debt  retirement  takes  precedence 
over  all  other  expenditures."  This  is  the  reverse  of  the  gen- 
eral rule. 

Prof.  Atkinson  states  that  in  1917  "if  all  cities  had  met 
the  interest  on  their  bonds  and  the  entire  cost  of  debt  retire- 
ment from  taxation,  debt  charges  alone  would  have  exceeded 
the  total  tax  revenue  of  the  80  cities  of  Ohio  by  $180,000. 
*  *  *  Cities  were  confronted  with  the  alternative  of  re- 
funding their  bonds  as  they  fell  due  or  of  borrowing  money 
for  running  expenses.  The  large  cities  compromised  by  doing 
both.  In  that  way  immense  floating  debts  were  incurred 
which  cities  were  utterly  incapable  of  paying,  and  the  legis- 
lature was  forced  to  authorize  the  issuance  of  deficiency 
bonds." 

The  Gardner  Act. — Some  relief  was  afforded  by  the  so- 
called  Gardner  Act,  which  allowed  taxing  districts  by  popular 
vote  to  place  their  interest  and  sinking  fund  charges  outside 
the  15-mill  limit,  but  the  Gardner  Act  is  only  a  makeshift 
remedy  at  best. 

"Fifteen  mills  may  seem  an  adequate  provision  for  mu- 
nicipal revenue,  but  it  must  not  be  forgotten  that  the  city  is 
only  one  of  several  agencies  of  government  among  which  the 
15  mills  is  parcelled  out.  The  apportionment  of  the  tax  rate 
is  entrusted  to  a  county  budget  commission  consisting  of  the 
auditor,  treasurer,  and  prosecuting  attorney — all  county  of- 
ficials. The  requirements  of  the  State  are  first  provided  for, 
and  needless  to  say,  the  budget  commissioners  see  that  the 
county  receives  second  consideration.  The  requests  of  the 
school  board  usually  come  next  in  the  order  of  preference, 
while  the  city,  library  board  and  other  agencies  of  govern- 
ment have  to  be  content  with  what  remains." 

Argument  against  any  tax  limit. — That  limitations  on 


40  MUNICIPAL  BONDS 

taxation  for  general  purposes  are  vicious,  is  to  some  extent 
a  matter  of  debate.  Among  the  arguments  that  may  be 
urged  against  municipal  tax  limits  are  the  following: 

The  object  of  a  limit  on  taxation  for  current  expenses  is 
sufficiently  provided  for  by  the  accountability  of  the  munici- 
pal authorities  to  their  constituents.  In  the  event  of  the  city 
government  being  extravagant  the  taxpayers  have  ample 
power  to  apply,  and  will  apply,  the  necessary  check  by  refus- 
ing to  re-elect  the  members  responsible  for  such  extravagance. 
Owing  to  the  difference  of  conditions  in  various  cities,  and 
owing  to  the  fact  that  a  situation  may  be  created  from  time 
to  time,  which  would  make  a  limit  that  was  proper  for  one 
year  absolutely  improper  for  another  year,  it  is  not  practi- 
cable to  fix  upon  a  general  tax  limit  for  all  cities.  One  of  the 
results  of  limitations  on  taxation  for  current  expenses  is  that 
municipalities  issue  long-term  bonds  for  current  expenses,  in 
order  to  avoid  the  limitation.  This  evil  exists  even  where 
the  tax  limit  applies  to  bonds  as  well  as  to  current  expenses, 
because  the  taxation  to  pay  the  bonds  is,  of  course,  spread 
over  a  period  of  years. 

In  an  article  by  Mr.  H.  G.  Loeffler,  appearing  in  the 
National  Municipal  Review^  entitled,  "Municipal  Tax  Limits 
and  Economy,"  it  is  said:  "Where  limits  prevail,  one  of 
three  things  happens.  The  cities  bring  pressure  to  bear  until 
the  limit  is  raised,  or  they  resort  to  continued  court  action 
until  a  satisfactory  decree  is  obtained  from  the  judiciary,  or 
they  fund  the  amount  needed  over  future  years  by  bonding. 
It  is  certain  that  the  elected  officials  will  do  all  in  their  power 
to  satisfy  the  growing  demands  of  the  public.  Experience 
seems  to  indicate  that  heretofore  they  have  been  successful, 
laws  notwithstanding. 

"There  is  only  one  way  out  of  this  situation  after  tax 
limits  are  abolished.  That  way  lies  along  the  lines  of  an 
efficient  budget  system.  Make  this  system  a  picture  of  the 
services  demanded  from  the  government.  Center  the  respon- 
sibility for  the  administration  of  it  in  one  single  elected 
official.  Place  on  the  statute  books  a  bonding  act  which  will 
not  allow  the  cities  to  follow  an  unsound  borrowing  policy 
such  as  is  being  forced  on  many  of  them  now  by  tax  limits 
and  special  bonding  laws. 

"It  is  felt  that  if  a  process  such  as  this  is  worked  out, 
limitations  of  tax  levies  will  be  uncalled  for.     The  State  laws 


TAXATION  AND  LIMITATION  OF  TAXES       41 

will  not  then  be  productive  of  vicious  bonding.  In  the  budget 
the  pubHc  will  see  the  result  financially  of  any  new  or  extended 
governmental  service  demanded.  If  they  feel  that  this  new 
activity  is  worth  the  cost,  let  them  so  decide.  The  power  will 
then  rest  where  it  should  and  tax  limits  will  be  unnecessary." 

Arguments  against  any  tax  limits  on  debt  service. — The 
object  of  a  tax  limit  applicable  to  municipahties  is  sufficiently 
provided  for  by  a  limit  on  the  amount  of  bonds  that  may  be 
issued.  No  limit  should  be  placed  on  the  power  of  the  mu- 
nicipal debtor  to  pay  its  debt.  It  is  immoral  not  to  pay  debts. 
A  tax  limit  that  applies  to  municipal  bonds  injuriously  affects 
municipal  credit  and  tends  to  make  bonds  unmarketable.  If 
the  whole  of  the  tax  that  could  be  levied  within  the  limitation 
should  be  needed  to  pay  the  principal  and  interest  of  bonds, 
and  the  assessed  valuation  of  property  should  be  reduced  so 
that  the  tax  would  be  insufficient  to  pay  all  the  bonds,  the 
holders  of  the  bonds  first  issued  would  have  no  better  rights 
than  the  holders  of  the  last  bonds  issued.  Bonds  subject  to 
a  tax  limit  will  not  be  accepted  by  the  board  of  trustees  of 
the  Postal  Savings  system  nor  by  some  of  the  large  insurance 
companies. 

Revenue. — Taxes  are  not  the  only  source  from  which 
municipalities  derive  funds.  Moneys  coming  from  any  other 
sources  such  as  water  rents,  surplus  earnings  (if  any)  from 
other  public  utilities,  the  municipal  share  of  certain  State 
taxes,  which  may  be  considerable  in  amount,  are  usually  des- 
ignated as  "revenue."  These  are  so  uncertain  and  are  rela- 
tively so  unimportant  that  the  bondholder  is  not  especially 
concerned  and  the  careful  buyer  of  municipal  securities  will 
not  attach  much  importance  to  them. 


Chapter  VI 
MUNICIPAL  BORROWING 

The  power  to  incur  indebtedness. — Every  business  cor- 
poration has  the  privilege  of  borrowing  money  to  carry  out 
the  powers  granted  to  it  in  its  charter.  It  does  not  follow 
that  this  is  equally  true  of  municipal  corporations.  The  power 
is  sometimes  implied  but  is  closely  watched  by  the  courts,  and 
as  it  is  apt  to  be  subject  to  judicial  review,  the  courts  have 
had  more  opportunity  to  limit  the  power  than  in  the  case  of 
the  moneyed  or  business  corporation. 

The  power  to  borrow  is  usually  given  in  express  language, 
in  which  case  the  terms  and  purposes  of  the  grant  will  meas- 
ure its  extent.  If  the  power  is  not  expressly  conferred,  does 
it,  asks  Judge  Dillon,  exist  by  implication?  "The  question 
of  the  incidental  authority  of  municipal  corporations  to  bor- 
row money  has  often  been  considered  and  often  decided,  but 
the  decisions  are  not  uniform  or  reconcileable  as  to  the  extent 
or  even  existence  of  such  authority.  In  view  of  the  legisla- 
tive practice  to  confer,  in  terms,  all  powers  so  important  as 
this,  the  dangerous  nature  of  this  power,  by  reason  of  the 
temptation  it  holds  out  to  incur  needless  debts  and  to  make  ex- 
travagant expenditures,  and  the  facilities  it  offers  for  frauds, 
and  the  settled  and  salutary  doctrine  that  such  corporations 
have  no  powers  but  such  as  are  expressly  conferred,  and  those 
which  are  necessary  to  effect  the  objects  of  the  corporation, 
and  those  which  are  incidental  to  the  express  grants  where 
the  legislative  will  is  wholly  silent,"  Judge  Dillon  "is  strongly 
inclined  to  deny  the  existence  of  a  general  implied  or  general 
incidental  power  to  borrow  money,  or  much  less  to  issue 
negotiable  paper."  ^ 

"The  power  to  borrow  money  is,  in  a  certain  sense,  a 
larger  power  than  that  of  raising  money  by  taxation.  The 
resistance  of  the  parties  taxed  is,  in  the  nature  of  the  thing, 
an  immediate  check  to  taxation,  which  does  not  exist  in  the 
case  of  a  power  to  borrow,  for  the  immediate  burden  of  a 

*  Dillon,  p.  522. 

42 


MUNICIPAL  BORROJFING  43 

loan  is  but  slightly  felt.  Therefore  the  power  to  borrow 
money  should  not  be  inferred  from  any  of  the  ordinary 
powers  conferred  in  the  charters  of  municipal  corporations, 
and  under  ordinary  circumstances  such  a  power  can  proceed 
only  from  an  express  grant  to  that  effect."  - 

Summary  of  Judge  Dillon's  views. — The  following  is  a 
summary  of  Judge  Dillon's  views :  ^  Whether  there  is  power 
in  a  municipal  corporation  to  borrow  money  or  to  issue  nego- 
tiable paper  or  to  do  both  depends  upon  the  legislative  intent, 
to  be  collected  from  statutes,  general  and  special,  applicable 
to  the  municipality  or  to  the  particular  case. 

1.  The  power  to  borrow  money  as  a  means  of  raising  a 
fund  to  make  future  local  improvements  or  to  carry  on  the 
ordinary  operations  of  the  municipality  cannot  be  implied 
from  the  mere  authority  to  make  such  Improvements  or  from 
the  general  grants  of  municipal  power.  These  usually  con- 
template that  the  expense  of  the  execution  of  the  ordinary 
municipal  powers  shall  be  met  by  the  revenues  derived  each 
year  from  taxation.  (It  should  be  kept  constantly  in  mind 
that  annual  taxation  Is  the  normal  means  of  raising  funds,  and 
borrowing  is  abnormal. — Author.) 

2.  It  does  not  follow,  because  ^banking,  trading,  and 
other  private  corporations  organized  for  pecuniary  profit  are 
held  In  this  country  to  possess  the  Incidental  power  to  borrow 
money  and  to  Issue  commercial  paper  having  all  the  qualities 
attributed  to  such  paper  by  the  Law  Merchant,  that  a  like 
power  is  inherently  possessed  by  public  and  municipal  cor- 
porations. The  analogy  is  false  and  delusive.  *  *  *  The 
nature  of  the  usual  duties  devolved  by  law  upon  municipalities 
does  not  make  it  necessary  to  Imply  the  existence  of  a  general 
power  to  borrow  money  and  to  Issue  commercial  paper. 

3.  The  power  to  Issue  commercial  paper  which  Is  unim- 
peachable In  the  hands  of  the  holder.  Is  not  among  the  ordi- 
nary Incidental  powers  of  a  public  or  municipal  corporation. 
It  must  be  conferred  expressly,  or  by  fair  Implication,  as  a 
necessary,  or  at  least  a  reasonable  and  usual,  means  of  execut- 
ing the  particular  power  to  which  it  Is  claimed  to  be  Inci- 
dental. *  *  *  Any  fair  or  substantial  doubt  on  this  point 
is  fatal  to  the  existence  of  such  power. 

4.  Express    power    to   borrow   money,    In    some    States 

==  Dillon,  p.  532. 
"Dillon,  p.  539. 


44  MUNICIPAL  BONDS 

*  *  *  will  be  taken,  If  there  be  nothing  in  the  legislation 
to  negative  the  Inference,  to  Include  the  power,  *  *  *  to 
issue  negotiable  paper  with  all  the  Incidents  of  negotiability. 
But  under  *   *   *   a  constantly  Increasing  weight  of  authority 

*  *  *  an  express  power  to  borrow  does  not  necessarily 
authorize  the  issuance  of  negotiable  paper,  the  power  to  give 
to  evidences  of  municipal  Indebtedness  and  municipal  obliga- 
tions the  characteristics  of  negotiability  being  a  power  which 
must  be  conferred  upon  the  municipality  either  in  express 
words  or  their  equivalent  by  necessary  implication. 

5.  Although  a  municipal  corporation  *  *  *  may  *  *  * 
create  debts,  and  may,  when  not  restrained  by  statute,  evi- 
dence the  liabilities  thus  Incurred,  yet  If  the  instrument  is 
made  to  assume  the  form  of  negotiable  paper,  such  paper  is 
always  open  to  defenses  in  the  hands  of  the  transferees  when 
it  Is  issued  without  express  authority  from  the  legislature,  or 
authority  clearly  to  be  implied  from  the  charter  or  legislation 
applicable  to  the  municipality. 

Stated  In  other  words,  Judge  Dillon  regards  It  as  the  true 
doctrine  that,  "merely  as  Incidental  to  the  discharge  of  Its 
ordinary  corporate  functions,  no  municipal  or  public  corpora- 
tion has  the  right  to  invest  any  Instrument  It  may  Issue,  what- 
ever Its  form,  with  that  supreme  and  dangerous  attribute  of 
commercial  paper  which  insulates  the  holder  for  value  from 
defenses  and  equities  which  attach  to  Its  Inception."  ^ 

Limitations  on  incurring  indebtedness. — A  limitation 
placed  by  law  on  municipal  debt  creation  Is  generally  assumed 
to  be  a  protection  to  bondholders.  The  limit  is  usually  a  per- 
centage of  the  assessed  valuation  of  taxable  real  property.  If 
it  is  too  low  It  may  hamper  the  city  in  obtaining  needed  capi- 
tal for  Improvements. 

The  object  of  a  limitation  on  Indebtedness  is  obviously  to 
prevent  the  Increase  of  the  burden  of  taxation  or  to  keep 
taxation  within  limits  which  may  be  easily  borne.  It  Is  gener- 
ally based  on  real  property  valuations  because  these  are  more 
stable  than  taxes  on  personal  property.  Like  all  statutory 
limitations,  the  power  is  frequently  evaded  and  many  devices 
have  been  employed  to  evade  the  restrictions  placed  about  the 
power  to  contract  debts.  Notable  among  these  Is  the  plan  to 
provide  municipal  water  works  by  purchasing  a  plant  privately 
built,  subject  to  the  water  bonds  outstanding  which,  as  they 

*  Dillon,  pp.  539-543. 


MUNICIPAL  BORROWING  45 

are  not  a  direct  municipal  obligation,  are  not  a  part  of  the 
municipal  debt.^  As,  however,  the  water  bonds  rnust  be  re- 
deemed from  the  proceeds  of  taxation,  direct  or  indirect,  it 
seems  that  this  evasion  would  not  be  successful.  In  general, 
it  may  be  said  that  constitutional  or  statutory  provisions  in 
regard  to  the  creation  of  local  debt  which  are  too  strict  or 
too  narrow  are  undesirable  and  likely  to  lead  to  a  long  list  of 
exceptions  and  special  acts  which,  in  the  end,  will  take  much 
of  the  effectiveness  out  of  the  lim.itations." 

Constitutional  debt  limits. — A  constitutional  debt  limita- 
tion, while  a  protection  to  the  bondholder,  is  a  serious  thing 
because  bonds  issued  in  violation  of  the  limit  are  invalid.  The 
bondholder  may  obtain  relief  from  the  disastrous  effects  of  a 
statutory  debt  limit  by  an  appeal  to  the  legisature  but  there  is 
no  such  appeal  from  the  effect  of  a  constitutional  limitation. 

"As  long  as  the  municipality  has  a  sufficient  margin 
within  which  it  may  incur  debt  for  its  ordinary  purposes,  no 
difficulty  is  met  with  in  complying  with  the  simplest  and  most 
absolute  limitation;  but  the  moment  that  the  constitutional 
debt  limit  is  reached  or  so  closely  approached  that  a  city  no 
longer  has  the  credit  which  will  enable  it  to  finance  its  affairs, 
It  is  apparent  that  difficulties  immediately  arise.  The  city 
must  continue  to  manage  its  affairs  in  some  way.  It  must 
meet  current  expenses,  and  it  may  be  that  the  health  and  well- 
being  of  the  citizens  imperatively  require  the  expenditure  of 
large  amounts.  The  municipal  officers  try  to  overcome  these 
difficulties  as  best  they  can,  and  out  of  their  action  litigation 
frequently  follows.  The  nature  of  the  difficulties  which  have 
arisen  is  reflected  in  the  elaborate  constitutional  provisions 
which  have  been  adopted  In  later  years.  Each  qualification, 
restriction,  or  additional  safeguard  thus  Inserted  has  been 
adopted  for  the  purpose  of  overcoming  some  difficulty  or  cor- 
recting some  abuse  which  was  found  to  exist  under  the  simpler 
form  of  constitutional  limitations,  and  each  of  these  qualifica- 
tions, restrictions,  and  additional  safeguards  practically  repre- 
sents some  matter  with  which  the  courts  have  been  obliged 
to  deal."  ' 

Excepted  purposes. — Many  State  constitutions  make  pro- 
vision for  water  and  sewerage  "by  declaring  that  the  debt 

"Chamberlain,  p.  224, 
'  Raymond,  p.  152. 
VDillon,  p.  341, 


46  MUNICIPAL  BONDS 

incurred  for  water  supply  or  for  sewers  shall  not  be  subject 
to  the  limitation,  or  by  declaring  that  the  debt  limit  may  be 
increased  for  the  purpose  of  purchasing  or  constructing  water 
works  or  sewers;  in  some  instances,  lighting  plants  are  placed 
upon  a  similar  footing."  ^  The  reason  for  such  exceptions  is 
obvious.  A  pure  and  wholesome  supply  of  water  and  the  dis- 
posal of  refuse  matter  are  both  imperative  necessities  in  large 
communities.  Indeed,  there  is  another  reason  for  the  exemp- 
tion of  water  debt,  for  where  the  water  system  operates  by 
gravity  and  not  by  pumping,  the  revenues  should  be  sufficient 
to  maintain  the  plant  and  provide  the  necessary  funds  for 
debt  service.  Lighting  plants  are  in  many  jurisdictions  re- 
garded, at  least  in  theory,  as  self-sustaining  public  utilities. 
By  "self-sustaining"  is  meant  that  the  revenue  or  income  from 
the  utility  is  sufficient  to  pay  operating  charges  and  interest 
and  principal  of  the  debt  incurred  in  its  acquisition. 

Illustrations. — To  illustrate  these  statements,  the  consti- 
tutional and  statutory  limitations  applying  to  New  York  State 
municipalities  on  incurring  debt  may  be  considered.  Similar 
provisions  are  found  in  the  constitutions  and  laws  of  many 
States. 

"No  county,  city,  town  or  village  shall  *  *  *  be  allowed 
to  incur  any  indebtedness  except  for  county,  city,  town  or 
village  purposes  *  *  *.  No  county  or  city  shall  be  allowed 
to  become  indebted  for  any  purpose  or  in  any  manner  to  an 
amount  which,  including  existing  indebtedness,  shall  exceed 
ten  per  centum  of  the  assessed  valuation  of  the  real  estate  of 
such  county  or  city  subject  to  taxation,  as  it  appeared  by  the 
assessment  rolls  of  said  county  or  city  on  the  last  assessment 
for  State  or  county  taxes  prior  to  the  incurring  of  such  indebt- 
edness; and  all  indebtedness  in  excess  of  such  limitation, 
except  such  as  may  now  exist,  shall  be  absolutely  void,  except 
as  herein  otherwise  provided.  No  county  or  city  whose  pres- 
ent indebtedness  exceeds  ten  per  centum  of  the  assessed  valua- 
tion of  its  real  estate  subject  to  taxation  shall  be  allowed  to 
become  indebted  in  any  further  amount  until  such  indebted- 
ness shall  be  reduced  within  such  limit."  ^ 

Exceptions. — Exceptions  in  regard  to  indebtedness  in- 
curred in  anticipation  of  the  collection  of  taxes  and  applying 

"Dillon,  p.  339. 

*  Constitution,  Art.  VIII,  Sec.  10,  as  last  amended  November  6,  1917,  in 
effect  January  1,  1918. 


MUNICIPAL  BORROJVING  47 

to  the  City  of  New  York  follow,  and  the  section  further 
provides : 

"Nor  shall  this  section  be  construed  to  prevent  the  issue 
of  bonds  to  provide  for  the  supply  of  water;  but  the  term  of 
the  bonds  issued  to  provide  the  supply  of  water,  in  excess  of 
the  limitation  of  indebtedness  fixed  herein,  shall  not  exceed 
twenty  years,  and  a  sinking  fund  shall  be  created  on  the  issu- 
ing of  the  said  bonds  for  their  redemption,  by  raising  annually 
a  sum  which  will  produce  an  amount  equal  to  the  principal 
and  interest  of  said  bonds  at  their  maturity.  All  certificates 
of  indebtedness  or  revenue  bonds  issued  in  anticipation  of  the 
collection  of  taxes  which  are  not  retired  within  five  years  after 
their  date  of  issue,  and  bonds  issued  to  provide  for  the  supply 
of  water,  and  any  debt  hereafter  incurred  by  any  portion  or 
part  of  a  city,  if  there  shall  be  any  such  debt,  shall  be  included 
in  ascertaining  the  power  of  the  city  to  become  otherwise 
indebted;  except  that  *  *  *  debts  incurred  by  any  city  of  the 
second  class  after  the  first  day  of  January,  nineteen  hundred 
and  eight,  and  debts  incurred  by  any  city  of  the  third  class 
after  the  first  day  of  January,  nineteen  hundred  and  ten,  to 
provide  for  the  supply  of  water,  shall  not  be  so  included." 

Note  that  the  constitutional  limitations  apply  only  to 
counties  and  cities,  not  to  villages,  towns  or  school  districts. 
The  limitations  applying  to  the  City  of  New  York  are  omitted 
as  being  special  in  their  application  and  not  of  general 
interest. 

While  these  provisions  are  self-executing  (that  is,  legisla- 
tion is  not  necessary  to  make  them  workable),  the  same 
article  and  section  of  the  constitution  directs  the  legislature 
to  "prescribe  the  method  by  which  and  the  terms  and  condi- 
tions under  which  the  amount  of  any  debt  to  be  so  excluded 
shall  be  determined,  and  no  such  debt  shall  be  excluded  except 
in  accordance  with  the  determination  so  prescribed." 

In  the  New  York  General  Municipal  Law,  which  applies 
to  counties,  towns,  cities  and  villages,  we  find : 

"No  county  containing  a  city  of  more  than  one  hundred 
thousand  inhabitants,  nor  any  such  city  shall  contract  any 
debt,  the  amount  of  which,  exclusive  of  its  outstanding  debt, 
shall  exceed  a  sum  equal  to  five  per  centum  of  the  aggregate 
valuation  of  the  real  property  within  its  bounds,  as  assessed 
for  State  and  county  purposes  upon  the  then  last  corrected 
assessment-roll,   nor   shall   it  contract   any   such   debt   if   the 


48  MUNICIPAL  BONDS 

amount  thereof  inclusive  of  its  outstanding  debts  shall  exceed' 
a  sum  equal  to  ten  per  centum  of  such  valuation.  This  sec- 
tion shall  not  be  construed  to  prevent  the  issuing  of  certifi- 
cates of  indebtedness  or  revenue  bonds  issued  in  anticipation 
of  the  collection  of  taxes  of  amounts  actually  contained  or  to 
be  contained  in  the  taxes  for  the  year  when  such  certificates 
or  revenue  bonds  are  issued  and  payable  out  of  such  taxes. 
Nor  shall  this  section  be  construed  to  prevent  the  issuing  of 
bonds  to  provide  for  the  supply  of  water,  but  the  term  of  the 
bonds  issued  to  provide  for  the  supply  of  water  shall  not 
exceed  twenty  years,  and  the  sinking  fund  shall  be  created 
on  the  issuing  of  said  bonds  for  their  redemption  by  raising 
annually  a  sum  which  will  produce  an  amount  equal  to  the 
amount  of  the  principal  of  said  sum  and  interest  of  said  bonds 
at  their  maturity.  This  section  shall  not  apply  to  debts  con- 
tracted for  the  purpose  of  retiring  or  paying  any  existing 
indebtedness  pursuant  to  the  provisions  of  this  chapter,"  ^" 

The  Village  Law  provides  that: 

"A  village  shall  not  incur  indebtedness  if  thereby  its  total 
contract  indebtedness,  exclusive  of  liabilities  for  which  taxes 
have  already  been  levied  and  obligations  issued  to  provide  for 
the  supply  of  water,  shall  exceed  ten  per  centum  of  the 
assessed  valuation  of  the  real  property  of  such  village,  sub- 
ject to  taxation,  as  it  appeared  on  the  last  preceding  village 
assessment-roll."  ^^ 

Typical  debt  statements  of  second  and  third  class  cities 
in  New  York  follow  this  chapter.  They  should  be  read  in 
connection  with  the  foregoing  extracts  from  the  constitution 
and  statutes. 

Debt  limit  contained  in  Pierson  Act. — In  the  State  of 
New  Jersey  there  is  no  constitutional  debt  limit  and  the  statu- 
tory limitation  is,  so  far  as  is  germane  to  our  inquiry,  con- 
tained in  the  Pierson  Act.^- 

When  Mr.  Pierson  and  his  collaborators  began  their  work 
of  drafting  a  uniform  statute  to  govern  the  issue  of  munici- 
pal obligations,  it  was  found  necessary  to  limit  in  some  way 
the  indebtedness  which  might  be  incurred.  The  power  of 
counties  to  incur  debt  is  limited  to  four  per  cent  of  the  average 
assessed  valuation  of  the  taxable  real  estate  for  the  preceding 


°  Cons.  Laws,  Chap.  24,  Sec.  3. 
'  Cons.  Laws,  Chap.  64,  Sec.  130. 
'P.  L.,  1917,  p.  803. 


MUNICIPAL  BORROJVING  49 

three  years.  Municipal  indebtedness  other  than  that  of 
counties  is  limited  to  seven  per  cent,  although  in  certain  cases 
additional  indebtedness  not  to  exceed  two  per  cent  may  be 
incurred.  The  method  of  arriving  at  these  percentages  is 
highly  artificial.  It  may  have  been,  for  example,  that  certain 
municipalities  were  largely  indebted  for  the  construction  of 
bulkheads  intended  to  protect  the  water  front  from  encroach- 
ments by  the  sea,  and  if  this  debt  were  counted  against  the 
borrowing  power,  very  little  margin  would  remain.  Hence 
it  is  provided  that  such  debt  may  be  excluded  in  its  entirety. 
In  cities  (or  other  municipalities  operating  under  the  "City" 
article  of  the  School  Law)  indebtedness  incurred  for  educa- 
tional purposes  may  be  excluded,  if  it  does  not  exceed  three 
per  cent  of  the  average  assessed  valuation  of  the  taxable  real 
property  for  the  preceding  three  years,  or  if  it  does,  an 
amount  equal  to  three  per  cent  may  be  excluded.  So,  also, 
water  bonds  may  be  excluded  in  their  entirety. 

Typical  annual  and  supplemental  debt  statements  of  a 
large  New  Jersey  city  filed  pursuant  to  the  statute  follow 
this  chapter;  after  which  is  a  summary  statement  of  the  in- 
debtedness of  the  same  city  at  substantially  the  same  time. 
The  latter  statement  shows  the  true  debt.  The  two  former 
show  the  highly  artificial  deductions  permitted  by  the  statute. 
It  is  obvious  that  the  net  debt  stated  in  this  manner  may  be 
very  far  from  reflecting  the  real  condition  of  the 
municipality. 

In  conclusion  it  may  be  said  that  indebtedness  of  ten  per 
cent  is  dangerously  high. 

The  power  to  issue  negotiable  instruments. — As  we  have 
seen,  the  weight  of  authority  is  that  municipal  corporations 
have  no  implied  power  to  issue  negotiable  Instruments  but 
such  a  power  must  be  looked  for  in  the  charter  or  some  other 
act  of  the  legislature;  "the  legislative  act,  being  the  only 
source  of  the  authority,  measures  and  limits  the  power  it  con- 
fers." ^^  If  the  statute  gives  no  power  to  Issue  the  bond,  the 
municipality  is  not  bound. ^^  "A  municipality  can  only  act 
under  and  in  accordance  with  the  statutory  authority  which 
is  conferred  upon  it.  If  the  power  is  limited,  it  cannot  exceed 
the  prescribed  limit,  and  its  power  Is  exhausted  when  the 
limit  is  reached.     If  it  requires  further  powers,  it  must  obtain 

"Dillon,  p.  1354. 

"  U.  S.  V.  Macon  (1878),  99  U.  S.  582. 


50  MUNICIPAL  BONDS 

these  by  a  further  grant  from  the  legislature.  In  granting 
such  authority  the  power  of  the  legislature  is  supreme,  except 
In  so  far  as  it  is  limited  and  controlled  by  constitutional  pro- 
visions." ^^  The  rule  is  that  whenever  the  power  to  issue 
bonds  is  called  in  question,  the  authority  to  issue  must  be 
clearly  shown  and  will  not  be  inferred  from  uncertain  data 
and  can  only  be  conferred  by  language  which  leaves  no  reason- 
able doubt  of  intent  to  confer  it.^® 

This  canon  is  so  well  recognized  that  express  power,  ordi- 
narily sufficient  to  the  needs  of  the  municipal  or  quasi-munici- 
pal corporation,  is  usually  found  in  charters  or  general  stat- 
utes applicable  to  the  municipality. 

Power  to  issue  bonds. — The  power  to  issue  negotiable 
long-time  bonds  is  one  which  experience  has  shown  to  be  espe- 
cially liable  to  serious  abuse.  The  proneness  of  municipali- 
ties to  incur  indebtedness,  especially  if  its  burden  can  be 
thrown  upon  posterity,  is  well  known  and  needs,  in  the  in- 
terest of  the  public  welfare,  to  be  regulated  and  restricted. 
Power  to  create  debts  payable  in  the  future  is  necessary  in 
order  to  enable  municipalities  to  make  expensive  and  perma- 
nent local  improvements  such  as  building  sewers,  paving 
streets,  erecting  necessary  public  buildings,  procuring  public 
parks,  constructing  or  acquiring  water  works,  lighting  plants, 
and  other  public  utilities  if  desired.  The  burden  of  such 
large  expenditures  should  not  be  paid  immediately  but  spread 
over  a  reasonable  period  of  time.^"^ 

Illustrations  of  statutes  granting  bond-issuing  power. — 
For  illustrative  statutes  granting  power  to  issue  bonds,  we 
may  again  turn  to  New  York  and  New  Jersey. 

The  statutory  authority  for  the  issue  of  bonds  in  New 
York  is  found  in  several  general  statutes  and  in  many 
special  ones.    We  need  consider  only  the  following: 

The  County  Law. — The  County  Law  provides  that  boards 
of  supervisors  may: 

"Borrow  money  when  they  deem  it  necessary  for  the  erec- 
tion or  alteration  of  county  buildings  and  for  the  purchase 
of  sites  therefor,  on  the  credit  of  the  county,  and  for  the 
funding  of  any  debt  of  the  county  not  represented  by  bonds, 
and  issue  county  obligations  therefor,   and  for  other  lawful 

"Dillon,  p.  1358. 
"Dillon,  p.  1359. 
"  Dillon,  p.  336. 


MUNICIPAL  BORROJVING  51 

county  uses  and  purposes;  and  authorize  a  town  in  their 
county  to  borrow  money  for  town  uses  and  purposes  on  its 
credit,  and  issue  its  obligations  therefor,  when,  and  in  the 
manner,  authorized  by  law."  ^'^ 

The  General  Municipal  Law. — As  pointed  out  above,  the 
General  Municipal  Law  applies  to  counties,  towns,  cities  and 
villages.     It  also  provides  that: 

"A  funded  debt  shall  not  be  contracted  by  a  municipal 
corporation,  except  for  a  specific  object,  expressly  stated  in 
the  ordinance  or  resolution  proposing  it;  nor  unless  such  ordi- 
nance or  resolution  shall  be  passed  by  a  two-thirds  vote  of 
all  the  members  elected  to  the  board  or  council  adopting  it, 
or  submitted  to  and  approved  by  the  electors  of  the  town  or 
county,  or  taxpayers  of  the  village  or  city  when  required  by 
law.  *  *  *  Such  ordinance  or  resolution  shall  provide  for 
raising  annually,  by  tax,  a  sum  sufficient  to  pay  the  interest 
and  the  principal,  as  the  same  shall  become  due."  ^^ 

This  statute  also  contains  adequte  provisions  for  the  levy 
of  a  tax  for  debt  service,^"  for  refunding,-^  and  registra- 
tion,-- and  will  repay  study. 

The  General  City  Law  contains  a  general  grant  of  power 
for  all  cities: 

"To  become  indebted  for  any  public  or  municipal  purpose 
and  to  issue  therefor  the  obligations  of  the  city,  to  determine 
upon  the  form  and  the  terms  and  conditions  thereof,  and  to 
pledge  the  faith  and  credit  of  the  city  for  payment  of  prin- 
cipal and  interest  thereof,  or  to  make  the  same  payable  out 
of  a  charge  or  lien  upon  specific  properties  or  revenues; 
*  *  *  To  establish  and  maintain  sinking  funds  for  the  liqui- 
dation of  principal  and  interest  of  any  indebtedness,  and  to 
provide  for  the  refunding  of  any  indebtedness  other  than  cer- 
tificates of  indebtedness  or  revenue  bonds  issued  in  anticipa- 
tion of  the  collection  of  taxes  for  amounts  actually  contained 
or  to  be  contained  in  the  taxes  for  the  year  when  such  cer- 
tificates or  revenue  bonds  are  issued  or  in  the  taxes  for  the 
year  next  succeeding,  and  payable  out  of  such  taxes."  -^ 

This    statute    also   provides   that   before    bonds    may   be 

"Cons.  Laws,  Chap.  11. 

"7^.,  Chap.  24,  Sec.  6. 

^'Id.,  Sec.  7. 

^Id.,  Sec.  8. 

^Ud.,  Sees.  10,  11. 

"^Id.,  Chap.  21,  Sec.  20,  sub.  5. 


52  MUNICIPAL  BONDS 

issued,  a  statement  of  the  financial  condition  of  the  city  must 
be  made  by  the  comptroller  and  filed  in  the  office  of  the  city 
clerk.  Under  well-established  principles  every  purchaser  of 
bonds  is  charged  with  notice  of  the  contents  of  this  certificate 
and  an  examination  of  a  properly  prepared  certificate  should 
show  whether  or  not  the  city  is  within  its  debt  limit.  See  the 
debt  statement  of  a  New  York  third  class  city,  which  follows 
this  chapter.  The  provisions  of  the  Second  Class  Cities 
Law  ^*  in  regard  to  temporary  and  funded  debts  are  very 
liberal  and  permit  the  creation  of  a  funded  debt  "for  any 
municipal  purpose."  This  statute  also  contains  various  limi- 
tations upon  the  grant  of  power,  as  to  maturities,  execution, 
sale,  and  medium  of  payment,  and  the  following  interesting 
estoppel  provision: 

*'An  ordinance  creating  a  funded  debt  may  provide  that 
the  bonds  therein  authorized  shall  contain  a  recital  that  they 
are  issued  pursuant  to  law  and  an  ordinance  of  the  common 
council,  as  provided  by  section  sixty  of  the  Second  Class 
Cities  Law.  Such  recital,  when  so  authorized,  as  aforesaid, 
shall  be  conclusive  evidence  of  the  regularity  of  the  issue  of 
said  bonds  and  of  their  validity."  -^ 

The  Pierson  Act  of  New  Jersey. — In  New  Jersey,  the 
power  to  incur  debt  and  issue  negotiable  instruments  for 
municipal  capital  expenditures  is  found  in  the  Pierson  Act,^* 
so  frequently  referred  to.  This  act  provides  that  any  county 
or  municipality  shall  have  power  to  "borrow  money  and  issue 
its  negotiable  bonds  to  pay  for  any  improvement  or  property 
which  it  is  or  may  be  authorized  or  required  by  law  to  make 
or  acquire,  or  for  any  other  purpose  which  it  is  authorized  or 
required  by  law  to  undertake  or  for  which  it  is  authorized  or 
required  by  law  to  make  an  appropriation  or  to  refund  bonds 
*  *  *  or  for  two  or  more  such  purposes."  The  machinery 
of  issuing  bonds  under  this  statute  is  extremely  interesting 
and  will  well  repay  examination  in  detail.  Briefly,  the  term 
of  the  bonds  depends  upon  the  life  of  the  improvements,  as 
defined  in  the  act.  Valuable  estoppel  provisions  and  an  ex- 
tremely interesting  scheme  of  public  sale  which  will  be 
examined  later  in  more  detail  are  also  to  be  found. 

**  Cons.  Laws,  Chap.  53,  Sees.  60,  61. 

^Id..  Sec.  60. 

"P.  L.  1917,  p.  803. 


MUNICIPAL  BORROWING  53 

The  Municipal  Finance  Act  of  North  Carolina. — Prob- 
ably one  of  the  best  illustrations  of  statutes  authorizing  the 
issue  of  bonds,  limiting  the  power  to  issue  them  and  prescrib- 
ing the  method  of  issue,  is  the  Municipal  Finance  Act  of 
North  Carolina.  It  is  so  important  that  it  is  given  in  its 
entirety  as  an  appendix  to  this  volume,  and  will  well  repay 
careful  study. 

Refunding. — The  power  to  refund  valid  and  subsisting 
debt  must  ordinarily  be  expressly  granted  for  the  reason  that 
the  exercise  of  the  power  inevitably  results  in  the  issue  of 
negotiable  securities.  Refunding  does  not  increase  the  mu- 
nicipal debt.  It  merely  changes  the  evidence  of  the  debt  and 
the  time  of  its  payment.  If  valid  bonds  have  been  issued 
and  the  municipality  has  exceeded  its  debt  limit,  maturing 
bonds  may  nevertheless  be  refunded  (pursuant  to  proper 
statutory  authority)  in  spite  of  the  excess  of  indebtedness,  for 
the  reason  that  the  refunding  operation,  as  stated,  does  not 
increase  the  debt. 

Legislative  ratification. — In  conclusion  it  may  be  noted 
that  where  municipal  bonds  are  issued  without  proper 
authority,  the  legislature  may  legalize  the  unauthorized  acts, 
provided  it  might  have  conferred  authority  before  the  unau- 
thorized acts  were  committed,-'^  but  corporate  ratification 
without  legislative  authority  cannot  make  a  municipal  bond 
valid  which  was  void  when  issued.-^ 

Short  term  loans. — These  are  made  in  anticipation  of  the 
collection  of  taxes  and  to  finance  temporarily  the  construction 
cost  of  improvements.  By  temporary  financing,  the  cost  of 
an  improvement  may  be  determined  in  advance  of  a  perma- 
nent bond  issue,  and  an  overissue  avoided.  For  loans  of  this 
class,  the  economic  basis  is  different  from  that  for  long  term 
bonds.  Such  loans  are  highly  regarded  by  many  investment 
bankers  and  by  banking  houses  generally,  because  they  are 
more  or  less  liquid  assets,  paid  from  the  current  taxes  In  antici- 
pation of  which  the  loans  are  made,  or  funded  when  perma- 
nent bonds  are  issued.  Until  recently,  it  was  not  the  custom  to 
require  the  opinion  of  counsel  as  to  the  legality  of  such  loans 
but  the  practice  is  growing. 

^'Anderson  v.  Santa  Anna  (1885),  116  U.  S.  356. 
^'Leivis  v.  City  of  Shreveport  (1883),  108  U.  S.  282. 


54  MUNICIPAL  BONDS 

Debt  Statement  of  a  New  York  Second  Class  City 

Schedule  No.  I 

STATE  OF  NEW  YORK  \  „„. 

COUNTY  OF  WESTCHESTER/ 

I,  JAMES  W.  HOWORTH,  City  Clerk  of  the  City  of  Yonkers,  do  hereby 
certify  that  the  assessed  valuation  of  property  subject  to  taxation  located  within 
the  City  of  Yonkers  in  the  year  1921,  for  the  purpose  of  State,  County  and  City, 
as  shown  by  the  assessment  rolls  for  said  year,  is  as  follows: 

Real  Estate   $174,856,895.00 

Personal    348,550.00 

Special    Franchise    3,266,142.00 

$178,471,587.00 

IN  WITNESS  WHEREOF,  I  have  hereunto  set  my  hand  and  affixed  the 
seal  of  the  City  of  Yonkers,  this  15th  day  of  January,  1921. 

J.  W.  HOWORTH, 

City  Clerk. 

STATEMENT    OF    CONSTITUTIONAL    DEBT-INCURRING    CAPACITY 

OF  THE  CITY  OF  YONKERS,  N.  Y.,  AS  OF  FEBRUARY  10,  1921, 

INCLUDING   $2,312,000.00   BONDS   TO    BE    SOLD 

JANUARY  25th,  1921. 

Limit: 

Ten  per  centum  (10%)  of  Assessed  Valuation  of  Real  Estate  (in- 
cluding Special  Franchises)   as  filed  with  the  City  Clerk,  Oc- 
tober 1,  1920,  subject  to  taxation  in  1921   (Schedule  No.  1)  ..  .$17,812,303.70 
Net  Debt:   (Schedule  No.  2) 12,490,749.20 


Margin  of  Debt-Incurring  Capacity  as  of  February  10th,  1921....$  5,321,554.50 

Schedule  No.  2 

DESIGNATION  AND  PURPOSE  OF  BONDS 

City   Hall    $     275,800.00 

Local  Improvement 2,308,533.33 

Deficiency    1,396,500.00 

Building    200,050.00 

Water     2,495,250.00 

Equipment   186,800.00 

Street  Paving 109,280.00 

Park    144,000  00 

Street  Repair   6,000.00 

Road    Improvement    81,500.00 

School  3,852,810.00 

Hospital     113,750.00 

Assessment    1,511,000.00 

Tax  Sale  .' 355,000.00 

Grade  Crossing  Elimination 149,000.00 

Dock     1 54,000.00 

Total  Bonds   %U,2>m,ni.'hi 


MUNICIPAL  BORROWING  55 

NOTES: 

Local   Improvement    $  1,409,000.00 

Bond   Notes    1,238,000.00 

In  anticipation  of  the  collection  of  Taxes  and 

Revenues   2,350,000.00 

Total    Notes    $  4,997,000.00 

CONTRACT  LIABILITY   861,476.08 

LAND   LIABILITY   20,000.00 

Total    Indebtedness $19,217,749.41 


DEDUCTIONS— TO   ASCERTAIN   MARGIN   OF   DEBT   INCURRING 

CAPACITY 

Notes  maturing  within  five   (5)  years  from  date  of  original  issue, 

in  anticipation  of  taxes  now  outstanding $  1,828,851.60 

Sinking  Fund  for  Water  Bonds  issued  prior  to  January  1,  1908.  .  80,408.92 

Water  Bonds  issued  after  January  1,  1908,  to  provide  for  the 
supply  of  water,  less  the  amount  thereof  used  to  pay  debts 
contracted  for  prior  to  January  1,  1908 1,435,250.00 

Proceeds   of  Bonds    and   Notes   to   pay   liabilities   included    above 

(not  including  proceeds  of  Water  Bonds) 2,391,033.01 

Outstanding  Bonds   maturing   this  year,   provided   for   in    annual 

estimate   of   1921    (not   including  Bonds   otherwise   deducted)        991,456.67 

TOTAL  DEDUCTIONS    $  6,727,000.20 

NET  DEBT   $12,490,749.20 

STATE  OF  NEW  YORK 


} 


CO 

COUNTY  OF  WESTCHESTER  ^ 

I,  JAMES  J.  LYNCH,  Comptroller  of  the  City  of  Yonkers,  State  of  New 
York,  do  hereby  certify  that  the  statements  hereto  annexed,  concerning  the 
finances  of  said  city,  are  true  and  correct  as  appears  from  the  records  of  my 
office. 

IN  WITNESS  WHEREOF,  I  have  hereunto  set  my  hand  this  15th  day  of 
January,  1921. 

JAMES    J.    LYNCH, 

Comptroller  of  the  City  of 

Yonkers,  New  York. 


Debt  Statement  of  a  New  York  Third  Class  City 

STATE  OF  NEW  YORK   ; 
COUNTY  OF  ALBANY     )    '*''• 

Pursuant  to  Section  23-a  of  the  General  City  Law  constituting  chapter  21 
of  the  Consolidated  Laws,  I,  the  undersigned,  Comptroller  of  the  City  of 
Cohoes,    hereby   certify: 

(1)  The  existing  indebtedness  of  the  City  of  Cohoes,  on  the  date  of  this 
Certificate  is  One  million  two  hundred  eighty-five  thousand  one  hundred  forty- 
two  dollars  ($1,285,142.00). 


56  MUNICIPAL  BONDS 

(2)  The  amount  thereof  consisting  of  bonds  issued  to  provide  for  the 
supply  of  water  issued  prior  to  January  1,  1910,  and  also  bonds  issued  there- 
after to  refund  bonds  issued  prior  to  such  date,  or  the  term  of  which  is  more 
than  twenty  years  in  Two  hundred  forty-three  thousand  Dollars   ($243,000). 

(3)  The  amount  thereof  consisting  of  bonds  issued  to  provide  for  the 
supply  of  water  issued  after  January  1,  1910,  except  the  refunding  bonds 
specified  in  paragraph  2,  the  term  of  which  is  not  more  than  twenty  years  is 
Seventy-three  thousand  Dollars  ($73,000). 

(4)  The  amount  of  sinking  fund  for  the  redemption  of  outstanding  bonded 
indebtedness  is  (a)  for  the  redemption  of  water  bonds,  nothing;  and  (b)  for 
the  redemption  of  other  bonds.  Six  thousand  six  hundred  seventy-four  and 
67/100  Dollars   ($6,674.67). 

(5)  The  amount  of  certificates  of  indebtedness  or  revenue  bonds  issued  in 
anticipation  of  the  collection  of  taxes  outstanding  (a)  more  than  five  years  is 
nothing,  and   (b)    less  than  five  years  is  nothing. 

(6)  The  amount  of  such  certificates  of  indebtedness  or  revenue  bonds 
which  has  not  been  paid  out  of  taxes  for  the  year  when  such  certificates  or 
revenue  bonds  were  issued,  or  for  the  year  next  ensuing  is  nothing. 

(7)  The  amount  of  the  assessed  valuation  of  the  real  estate  of  the  City  of 
Cohoes,  subject  to  taxes  shown  by  the  assessment  rolls  of  said  City  on  the  last 
previous  assessment  for  State  or  County  taxes  is  Twelve  million  sixty-three 
thousand  two  hundred  sixty-seven   Dollars    ($12,063,267). 

(8)  A  description  of  the  property  or  improvement  for  the  acquisition  or 
making  of  which  the  debt  is  to  be  created  and  the  probable  life  or  such  proper- 
ties or  improvements  is    (Omitted). 

IN  WITNESS  WHEREOF  I  have  hereunto  set  my  hand  at  the  City  of 
Cohoes,  New  York,  this  15th  day  of  October,  1921. 

City  Comptroller. 

Annual  Debt  Statement  of  a  New  Jersey  City 

STATE  OF  NEW  JERSEY  \„„. 
COUNTY  OF  HUDSON       J 

James  F.  Gannon,  Jr.,  being  duly  sworn  deposes  and  says:  Deponent  is  the 
Director  of  Revenue  and  Finance  hereinafter  called  "the  municipality"  and  the 
chief  financial  officer  thereof.  The  Annual  Debt  Statement  annexed  hereto  and 
hereby  made  a  part  hereof  is  a  true  statement  of  the  debt  condition  of  the 
municipality  as  of  December  31,  1920.  The  amounts  of  such  items  as  are  indefi- 
nite or  unascertainable   are  estimated. 

JAMES  F.  GANNON,  JR. 
Subscribed  and  sworn  to  before  me 
this  first  day  of  January,  1921. 

RICHARD  ROE, 

Notary  Public  of  New  Jersey. 

A.  GROSS  INDEBTEDNESS 

The  gross  indebtedness  of  the  municipality,  inclusive  of  notes  or  bonds 
authorized  but  not  issued  and  obligations  of  the  municipality  held  uncanceled  in 
any  sinking  fund,  exclusive  of  indebtedness  incurred  for  current  expenses  of  the 
current  fiscal  year  and  inclusive  of  notes  and  bonds  and  certificates  of  the 
municipality  issued  for  school  purposes  other  than  for  the  current  expenses  of 


MUNICIPAL  BORROWING  57 

schools,  but  not  including  the  indebtedness  of  any  school  district  constituting  a 
separate  corporation,  is  as  follows: 

{a)   Bonded  Debt.      [Including  bonds  authorized  but  not  issued.) 

1.  Bonds  payable  or  to  be  payable  in  whole  or  in  part  out  of 

special   assessments  on  property  specially  benefited $  3,179,004.95 

2.  Bonds  issued,  and  authorized  but  not  issued,  for  the  fol- 
lowing purposes  so  far  as  separately  authorized  or  issued 
for  such  purposes: 

Docks    251,000.00 

Water    supply    14,650,254.72 

Electric  light  or  power None 

Gas    None 

Markets    None 

3.  Bonds   issued,    and    authorized    but    not    issued,    for   other 

purposes  from  the  carrying  out  of  which  the  munici- 
pality derives  revenue  from  rental  or  service.     (State 

purposes  separately.)     None 

None 

4.  Bonds   issued,    and   authorized   but   not   issued,   for   school 

purposes,  after  deducting  sinking  funds  and  funds  in 

hand  applicable  thereto   4,983,827.10 

5.  Bonds    issued,    and    authorized    but    not    issued,    for    park 

purposes.  (Note. — In  the  case  of  a  county,  deduct 
sinking  funds  and  funds  in  hand  applicable  to  such 
bonds)     None 

6.  Bonds  issued,  and  authorized  but  not  issued,  not  included 

above.     (State  purposes  separately) 7,000,250.00 

None 
None 
{b)  Evidences  of  indebtedness  other  than  bonds.  {Including 
temporary  notes  or  bonds,  issued  under  section  thir- 
teen of  Chapter  252,  P.  L.  1916,  as  amended.  Note. — 
Not  including  notes  issued  or  to  be  issued  iii  anticipa- 
tion of  taxes  of  the  current  fiscal  year.) 

1.  Evidences  of  indebtedness  issued,   and   authorized  but  not 

issued,  for  school  purposes 2,874,400.00 

2.  Other    evidences    of   indebtedness    issued,    and    authorized 

but  not  issued  7,632,946.06 

TOTAL  GROSS  INDEBTEDNESS $40,571,682.83 

B.  DEDUCTIONS 

The  deductions  are  as  follows: 

(a)  The  amount  of  special  assessments  levied  and  uncollected, 

applicable  to  the  payment  of  any  part  of  the  gross 
indebtedness  not  deducted  under  some  other  item 
hereof    $     603,759.83 

(b)  The  amount  as  estimated  by  resolution  of  the  governing 

body  of  special  assessments  to  be  levied,  which  will 
be  applicable  to  any  part  of  the  gross  indebtedness 
not  deducted  under  some  other  item  hereof Nothing 

(c)  Indebtedness  incurred,   and  authorized  but  not  incurred, 

for  the  purposes  below  stated    (but  not  for  the  sup- 


58  MUNICIPAL  BONDS 

port  or  maintenance  thereof)  separately  stated  in  so 
far  as  separately  issued  for  such  purposes,  the  pay- 
ment of  the  principal  and  interest  of  which  indebted- 
ness was  adequately  provided  for  from  revenue  from 
rentals  or  services  rendered  after  deducting  operat- 
ing expenses  during  the  previous  fiscal  year,  namely: 

1.  Docks    None 

2.  Electric  light  or  power None 

3.  Gas    None 

4.  Markets    None 

3%   of  the   average   assessed  valuation  as 

stated  in  subdivision  D  hereof $9,140,986.53 

Deductions    under    this    item     (c)     (Insert 

smaller  of  above  two  amounts) None 

(d)  Indebtedness  incurred   and   authorized  but 

not  incurred,  for  the  supply  of  water..  14,650,254.72 

(e)  The  net  indebtedness  incurred  and  author- 

ized but  not  incurred,  for  school  pur- 
poses as  stated  in  A  (a)  4,  and 
A    (b)    1 7,858,227.10 

3%   of  the    average   assessed   valuation   as 

stated  in  subdivision  D   hereof 9,140,986.53 

Deductions    under    this    item     (e)     (Insert 

smaller  of  above  two  amounts) 7,858,227.10 

(f)  Funds  in  hand   and   sinking  funds  or  such   parts  thereof 

as  are  held  for  the  payment  of  any  part  of  the  gross 
indebtedness  other  than  that  which  is  included  in  these 
deductions  or  otherwise  deducted.  Under  this  item  is 
included  the  proceeds  on  hand  of  any  bonds  or  notes 
held  to  pay  any  part  of  the  gross  indebtedness  and 
the  estimated  proceeds  of  bonds  or  notes  which  have 
been  authorized  if  such  estimated  proceeds  will  be 
held  for  that  purpose 5,165,320.64 

(g)  Amount    included    in    the    current    taxes    levied    for    the 

payment  of  any  part  of  the  gross  indebtedness  other 

than  that  which  is  included  in  these  deductions None 

(h)   Amount  of  unpaid   taxes   not   more   than   three  years   in 

arrears    1,189,195.27 

(i)  Indebtedness  incurred,  and  authorized  but  not  incurred, 
for  the  construction  or  reconstruction  of  dikes,  bulk- 
heads, jetties,  or  other  devices  erected  along  the  ocean 
or  inlet  fronts  and  intended  to  prevent  the  encroach- 
ment of  the  sea  including  the  improvements  to  restore 
property  damaged  by  the  sea None 

(j)  Amounts  owing  by  the  State,  by  other  municipalities  or 
by  other  persons  or  corporations  on  account  of  that 
part  of  an  improvement  (not  an  assessment  improve- 
ment) for  which  indebtedness  has  been  incurred  or 
authorized   and  not  deducted  under  some  other  item         None 


TOTAL  DEDUCTIONS    $29,466,757.56 


MUNICIPAL  BORROWING  59 

C.  THE  NET  DEBT 

The  net  debt  of  the  municipality  as  determined  by  deducting  the  deduc- 
tions as  stated  in  subdivision  B  from  the  gross  debt  stated  in  subdivision  A  is 
as  follows: 

Gross   debt    $40,571,682.83 

Deductions    29,466,757.56 

NET  DEBT   $11,104,925.27 

D.  AVERAGE  ASSESSED  VALUATION 

The  three  next  preceding  assessed  valuations  of  the  taxable  real  property 
(including  improvements)  of  the  municipality  and  the  average  thereof  is  as 
follows: 

1918  assessed  valuation  of  such  real  property $300,550,016 

1919  "  "  "  "  "        301,689,039 

1920  "  "  "  "  "        311,859,599 

AVERAGE  OF  SUCH  ASSESSED  VALUATIONS.  .  .$304,699,551 

E.  PERCENTAGE  OF  NET  DEBT  TO  AVERAGE   ASSESSED 
VALUATION 

The  percentage  that  the  net  debt  as  computed  under  subdivision  C  hereof 
bears  to  the  average  of  the  assessed  valuations  computed  under  subdivision  D 
hereof  is  as  follows: 

Three  and  64/100  per  cent   (3  64/100%) 

Supplemental  Debt  Statement  of  a  New  Jersey  City 


STATE  OF  NEW  JERSEY  )    j,„ 
COUNTY  OF  HUDSON  ^ 


JAMES  F.  GANNON,  Jr.,  being  duly  sworn  deposes  and  says: 
Deponent  is  the  Director  of  the  Department  of  Revenue  and  Finance  of 
the  City  of  Jersey  City  hereinafter  called  "the  municipality"  and  the  chief 
financial  officer  thereof.  The  supplemental  Debt  Statement  annexed  hereto 
and  hereby  made  a  part  hereof  is  a  true  statement  of  the  debt  condition  of  the 
municipality  on  the  date  hereof  and  is  computed  as  provided  for  the  annual 
debt  statement  by  Chapter  252  P.  L.  1916,  as  amended. 

Subscribed  and  sworn  to  before  me    )  j^j^^S  F.  GANNON,  JR. 

this  25th  day  of  July,  1921.  )  "'  '  •' 

ROBERT  ORR 

Commissioner  of  Deeds 

for  New  Jersey. 

A.  (1)  The  net  debt  of  the  municipality  as 
stated  in  subdivision  C  of  the  annual 
debt  statement  last  filed  is $  11,104,925.27 

(2)  The  amount  by  which  such  net  debt  has 

been  j  increased  /is 737,111.96 

'  decreased  S 

(3)  The  net  debt  at  the  time  of  this  state- 
ment is $  11,842,037.23 


60  MUNICIPAL  BONDS 

B.  The   amounts   and   purposes   separately   item- 

ized  of  the   bonds   or  notes   about  to  be 

authorized,  together  with  the   deductions 

which  may  be  made  on  account  of  each 

such  item: 

General  Improvement  Bonds   $    2,275,000.00 

Proceeds    thereof    to    be    applied    to    existing 

indebtedness    2,266,000.00 

TOTAL  under  this  Item  B 9,000.00 

C.  The   net   debt   of  the   municipality   after   the 

indebtedness   to   be    authorized   has   been 

incurred  is  (NOTE— Add  A  and  B)....  11,851,037.23 

D.  The    three    next    preceding    assessed    valua- 

tions of  the  taxable  real  property  (in- 
cluding improvements)  of  the  munici- 
pality and  the  average  thereof  is  as 
follows: 

1918  assessed  valuation $300,550,016.00 

1919  "  "        301,689,039.00 

1920  "  "        311,797,199.00 

Average  of  assessed  valuations $304, 678,75 l.(X) 

E.  The    percentage    that   the    net    debt    as    com- 

puted under  subdivision   C   hereof  bears 
to   the    average    assessed   valuation   com- 
puted under  subdivision  D   hereof   is   as 
follows: 
Three  and  89/100  per  cent  (3.89%). 

Summary  Debt  Statement  of  the  Same  New  Jersey  City 

CITY  OF  JERSEY  CITY,  N.  J. 
FINANCIAL  STATEMENT 

Total   outstanding  bonds $  31,009,510 

Water  Bonds   $14,650,255 

Sinking  funds   and  bond  cash   account  other   than   for 

Water    Bonds    6,002,185        20,652,440 


NET    BONDED    DEBT $  10,357,070 

Floating  and  temporary  indebtedness   (including  Temporary  Bonds 

issued,   and   authorized,   but   unissued) 10,487,345 

TOTAL    NET   DEBT $  20,844,415 

Less  amount  of  floating  or  temporary  indebtedness  to  be  funded  by 

bonds  to  be  issued 864,000 


$  19,980,415 
BONDS  TO  BE  ISSUED   864,000 


NET  DEBT,  INCLUDING  BONDS  TO  BE  ISSUED $  20,844,415 

ASSESSED  VALUATIONS 

Real  Property,   including  Improvements $319,075,528 

Personal   Property    50,772,250 

TOTAL .$369,847,778 


Chapter  VII 
THE  PROMISSOR  IN  THE  BOND 

Bonds  classified. — Most  writers  on  municipal  bonds  sep- 
arately classify  bonds  issued  by  the  United  States,  the  various 
States  of  the  Union,  counties  and  municipalities,  the  latter 
including  quasi  municipalities  and  taxing  districts. 

There  is  good  reason  for  separate  treatment  of  bonds 
issued  by  the  Federal  Government  and  the  States,  both  of 
which  have  a  peculiarity  hereinafter  referred  to.  There 
seems  to  be  no  adequate  reason  for  treating  bonds  issued  by 
counties  differently  from  those  issued  by  municipalities  and 
quasi  municipalities.  Neither  is  there  any  adequate  reason 
for  treating  together  municipal  and  quasi  municipal  obliga- 
tions. There  is,  indeed,  better  reason  for  a  separate  con- 
sideration of  bonds  issued  by  or  supported  by  taxation  of  the 
latter  class. 

It  will  be  remembered  that  legislatures,  within  certain 
limitations  not  here  relevant,  may  endow  counties  and  lesser 
political  subdivisions  with  such  powers  as  they  will.  The 
power  to  issue  negotiable  Instruments  being  statutory,  legis- 
latures need  not,  and  In  fact  do  not,  differentiate  between 
counties  and  municipalities  in  this  respect.  There  Is  techni- 
cally no  difference  between  the  borrowing  powers  of  cities 
and  counties,  except  such  as  are  created  by  the  constitutions 
of  the  States.  The  same  general  principles  governing  fiscal 
legislation  apply  to  counties  and  municipalities.  The  logical 
classification  is  first  as  to  the  promissor;  second,  as  to  the 
character  of  the  promise. 

Compulsory  payment. — It  has  been  well  suggested  that  a 
proper  classification  Is  that  based  on  means  of  payment,  that 
is,  whether  payment  Is  compulsory  or  not  compulsory.  This 
classification  would  distinguish,  because  of  accepted  prin- 
ciples, between  bonds  of  a  sovereign  power  (within  which 
would  be  included  the  Federal  and  State  Governments)  and 
bonds  of  municipalities.     There  is,  In  strict  legal  contempla- 

61 


62  MUNICIPAL  BONDS 

tlon,  no  obligation  upon  the  first  class  to  pay  its  debts.  The 
fulfillment  of  the  promise  of  a  government  rests  on  good 
faith.  When  a  municipality  promises  to  pay,  on  the  other 
hand,  its  promise  may  ordinarily  be  enforced.  Certainly,  it 
is  within  the  power  of  a  bondholder  to  sue  the  municipality 
and  the  courts  will  aid  him  to  the  full  extent  of  their  ability 
to  enforce  any  judgment  he  may  obtain. 

Federal  and  State  bonds. — Bonds  of  the  Federal  govern- 
ment and  those  of  the  various  States  are  outside  the  scope 
of  this  book.  Such  bonds  depend  upon  the  good  faith  of  the 
sovereign  because  the  sovereign  cannot  be  sued  without  its 
consent,  although  some  States,  such  as  New  York,  give  their 
consent  in  advance.  In  New  York  State,  any  person  may  sue 
the  State  in  the  Court  of  Claims  which  is  provided  for  the 
purpose,  but  there  is  no  means  of  enforcing  the  judgment  of 
the  Court  of  Claims  unless  the  legislature  makes  an  appro- 
priation. 

Before  dismissing  the  subject  of  State  bonds  as  not  strictly 
within  our  province,  it  may  be  said  that  although  States  do 
contract  debt  it  may  not  be  sound  economic  policy  for  them 
to  do  so  except  in  aid  of  public  enterprises  requiring  enormous 
sums  of  money.  The  building  of  the  Erie  Canal  in  New 
York  State  was  in  its  day  a  colossal  undertaking  and  the 
money  was  properly  borrowed.  The  relatively  recent  enlarge- 
ment of  the  Barge  Canal  was  another  such  undertaking. 
Neither  of  these  projects  could  have  been  paid  for  out  of 
funds  raised  by  taxation  in  one  year,  but  appropriations  for 
the  building  of  State  institutions,  such  as  hospitals,  should  be, 
and  in  eastern  States  generally  are,  included  in  the  annual 
budget  appropriations. 

County  bonds. — Counties  are  at  most  but  legal  organiza- 
tions which,  for  the  purpose  of  safe  administration,  are  vested 
with  a  few  functions  characteristic  of  a  corporate  existence. 
They  are  legal  subdivisions  of  the  State  "created  by  the 
sovereign  power  of  the  State,  of  its  own  sovereign  will,  with- 
out the  particular  solicitation,  consent  or  concurrent  action  of 
the  people  who  inhabit  them."  *  *  *  "With  scarcely  an 
exception,  all  the  powers  and  functions  of  the  county  organ- 
ization have  a  direct  and  exclusive  reference  to  the  general 
policy  of  the  State  and  are,  in  fact,  but  a  branch  of  the  general 
administration  of  that  poHcy."  ^     County  bonds  are  usually 

^Hamilton  Co.  v.  Mighels  (1857),  7  Ohio  St.  109. 


THE  PROMISSOR  IN  THE  BOND  63 

issued  for  the  construction  of  roads  and  bridges,  court  houses, 
jails  and  poorhouses. 

There  is  no  legal  principal  peculiarly  applicable  to  the 
issue  of  county  bonds.  The  questions  for  consideration  are 
economic;  that  is,  the  real  questions  are  those  of  taxing  power 
and  debt.  In  considering  the  latter  we  must  remember  that 
the  same  property  which  Is  taxed  by  the  county  for  county 
purposes  is  taxed  by  municipalities  for  their  own  purposes 
and  may  be  again  taxed  and  yet  again  taxed  by  various  minor 
subdivisions,  but  this  is  also  frequently  true  of  cities. 

Contingent  debt. — An  item  which  is  almost  never  consid- 
ered is  contingent  debt,  which  may  become  real  in  case  of 
default  of  a  minor  subdivision  of  the  county.  For  example, 
in  Virginia,  bonds  for  road  improvements  may  be  issued  by 
the  county,  payable  from  taxes  levied  in  specified  "magis- 
terial" districts.  The  taxable  property  in  such  districts  is 
primarily  liable  but  the  bonds  are  those  of  the  county  and 
the  statutes  provide  that  the  county  shall  be  liable  In  case  of 
default.  How  its  liability  may  be  enforced  Is  a  different  prob- 
lem under  the  statutes  authorizing  such  bonds.  Under  the 
decisions  it  is  real  liability,  contingent,  it  is  true,  but  liable  to 
become  actual.^ 

True  municipalities. — As  our  inquiry  is  largely  directed 
toward  ascertaining  the  powers  of  true  municipalities  to  issue 
negotiable  instruments,  we  may  dismiss  the  obligations  of 
such  at  this  point  with  the  understanding  that  according  to 
the  weight  of  authority  a  municipal  corporation  having  ordi- 
narily full  powers  may  have  implied  power  to  borrow  for 
municipal  purposes  but  It  must  have  express  statutory  power 
to  issue  negotiable  securities. 

Quasi  municipalities. — "Civil  corporations  are  of  different 
grades  or  classes.  *  *  *  The  school  district  or  road  district 
is  usually  Invested  by  general  enactments  operating  through- 
out the  State  with  a  corporate  character,  the  better  to  per- 
form within  and  for  the  locality  its  special  function,  which 
is  indicated  by  its  name.  It  is  but  an  instrumentality  of  the 
State  and  the  State  incorporates  it  that  it  may  the  more  effec- 
tually discharge  its  appointed  duty.  *  *  *  Considered  with 
respect  to  the  limited  number  of  their  corporate  powers,  the 
bodies  above  named,"  that  Is,  quasi  municipal  corporations, 
"rank  low  down  In  the  scale  or  grade  of  corporate  existence; 

'Moss  V.  Tazeu-ell  County  (Va.  1911),  112,  Va.  878;  72  S.  E.  945. 


64  MUNICIPAL  BONDS 

and  hence  have  frequently  been  called  quasi  corporations. 
This  designation  distinguishes  them  on  the  one  hand  from 
private  corporations  aggregate,  and  on  the  other  from  mu- 
nicipal corporations  proper,  such  as  cities  or  towns  acting 
under  charters,  or  incorporating  statutes,  and  which  are  in- 
vested with  more  powers  and  endowed  with  special  functions 
relating  to  the  particular  or  local  interests  of  the  municipality, 
and  to  this  end  are  granted  a  larger  measure  of  corporate 
life."  ^ 

Quasi  corporations  classified. — A  classification  of  quasi 
municipal  corporations,  which  is  suggested  by  the  actual  facts, 
is  as  follows: 

(a)  Those  which  may  borrow  and  tax. 

(b)  Those  which  may  borrow  but  not  tax. 

(c)  Those  which  may  be   taxed  but  may  not  borrow. 
Those  which  may  borrow  and  tax. — In  the  first  class,  that 

is  those  which  may  both  borrow  and  tax,  we  can  place  school 
districts,  the  boards  of  education  ordinarily  being  bodies  cor- 
porate, which  when  a  tax  has  been  levied,  as  in  New  York,  to 
be  collected  in  installments,  may  issue  bonds  payable  in  the 
same  years  as  the  installments  of  tax  are  to  be  levied.  Under 
this  classification  also  fall  irrigation,  levee,  and  drainage  dis- 
tricts. The  Miami  Conservancy  District  in  Ohio,  for  example, 
has  been  incorporated  for  the  purpose  of  enabling  the  people 
within  the  drainage  area  of  the  Miami  River  to  issue  bonds 
and  protect  themselves  against  floods  and  washouts.  Another 
well-known  example  of  a  specially  organized  political  sub- 
division is  the  Chicago  Sanitary  District.  The  district  was 
incorporated  to  enable  a  section  of  the  State  to  construct  and 
finance  drainage  canals  and  other  works  for  the  protection 
of  the  public  health.  In  connection  with  such  securities  it 
is  well  to  bear  in  mind  that  the  borrowing  power  must  be 
accompanied  by  the  taxing  power.  Otherwise  the  district 
would  lack  the  means  of  obtaining  revenues  to  meet  the 
charges  on  its  debt.  No  incorporated  political  district  can 
assign  Its  rights  to  tax  or  borrow  to  another  organization, 
since  it  is  a  firm  legal  principle  that  a  delegated  power  cannot 
be  re-delegated.'* 

Those  which  may  borrow  but  not  tax. — There  are  prob- 
ably very  few  quasi  corporations  which  may  borrow  but  may 

'Dillon,  p.  67. 
*  Sakolski,  p.  87. 


THE  PROMISSOR  IN  THE  BOND  6S 

not  tax.  The  Passaic  Valley  Sewer  Commission  in  New 
Jersey  is  a  quasi  corporation  of  this  character;  its  funds  are 
derived  from  payments  made  to  it  by  the  various  municipali- 
ties in  the  sewer  district  with  which  it  has  contracts,  but  in 
anticipation  of  the  receipt  of  funds  it  may  incur  temporary 
debt.^  The  general  scheme  of  financing  the  Passaic  Valley 
improvement  will  well  repay  consideration  by  the  student. 
Its  peculiar  characteristic  (that  it  may  not  tax)  is  caused  by 
a  constitutional  provision  in  New  Jersey  to  the  effect  that  a 
taxing  district  must  be  co-terminus  with  a  political  subdivision 
and  that  a  political  subdivision  cannot  be  divided  or  sub- 
divided to  form  a  tax  district.*' 

Those  which  may  be  taxed  but  may  not  borrow. — Quasi 
municipal  corporations  which  may  be  taxed  but  may  not  bor- 
row are  of  the  type  of  which  Virginia  "magisterial"  districts 
are  examples.  Bonds  for  road  improvements  in  such  districts 
are  issued  by  the  county.  The  funds  to  pay  the  bonds  are  de- 
rived from  taxes  levied  upon  property  in  the  district.  Hence 
we  can  say  that  such  quasi  corporations  may  be  taxed  but  may 
not  borrow.'^ 

From  the  investor's  viewpoint  the  distinction  between 
bonds  of  counties,  cities,  quasi  municipalities  and  taxing  dis- 
tricts is  most  important.  The  particular  features  of  the 
bonds  of  different  promissors  will  be  considered  in  subsequent 
chapters. 

"P.  L.  1907,  p.  31,  Sec.  7. 

^yan  Cleve  ir.  Seiver  Commissioners  (N.  J.  1903),  71  N.  J.  L.  574;  60  Atl. 
214. 

'  See  Laws  of  Virginia,  1908,  Chap.  70. 


Chapter  VIII 
THE  PROMISE  AND  THE  PURPOSE  OF  THE  BOND 

The  greatest  concern  should  be  shown  by  the  underwriter 
or  investor  as  to  the  character  of  the  promise  made  by  the 
bond.  No  matter  how  hmlted  or  special  the  means  of  pay- 
ment, the  municipal  bond  is  on  its  face  an  unlimited  and 
unqualified  promise  to  pay.  This  is  so  except  in  the  rare 
case  of  an  honestly  drawn  assessment  bond  which  may  state 
on  its  face  that  the  amount  promised  is  payable  only  from  a 
certain  fund  or  taxes  levied  in  a  certain  area,  less  than  the 
territory  included  in  the  issuing  unit. 

Debt  limit. — The  debt  limit  does  not  affect  the  character 
of  the  promise  because  the  debt  limit  is  or  is  not  exceeded  at 
the  moment  of  issue. 

If  an  issue  of  bonds  is  within  the  debt  limitation  when 
issued,  it  remains  so  and  if  its  life  is  extended  by  refunding, 
it  does  not  lose  this  characteristic.^  A  municipality  may  issue 
bonds  within  its  limit,  become  indebted  in  excess  of  it,  and 
lawfully  refund  the  bonds  issued  before  the  limit  was  reached, 
without  increasing  its  debt,  and  the  bonds  issued  to  refund 
the  old  debt  will  be  valid.  This  assumes  proper  statutory 
authority  to  refund. 

Whether  a  subsequent  reduction  of  the  debt  operates  to 
validate  bonds  issued  in  excess  of  the  limitation  of  indebted- 
ness may  depend  upon  constitutional  or  statutory  provisions, 
the  effect  of  the  estoppel,  if  any,  contained  in  the  form  of 
the  bond,  and  upon  the  circumstances  of  the  case.  If  the 
constitution  or  statute  provides  that  indebtedness  issued  in 
excess  of  the  limitation  shall  be  absolutely  void,  then  a  reduc- 
tion of  the  debt  so  that  the  bonds  in  question  fall  within  the 
permitted  limitation,  would  not  make  the  bonds  valid.  It  is 
possible  that  they  might  be  enforced  but  a  discussion  of  the 
circumstances  under  which  this  would  be  possible  will  carry 
us  too  far  into  problems  of  law.     The  point  to  be  observed 

^Poughkeepsie  v.  Quintard  (1892),  136  N.  Y.  275. 

66 


PROMISE  AND  PURPOSE  OF  BOND  67 

is  that  questions  of  limitation  of  indebtedness  do  not  affect 
the  character  of  the  promise  made  by  the  bond. 

Limited  taxation. — A  hmited  tax  rate  results  in  a  limited 
obligation.  Where  the  power  to  tax  to  pay  a  bond  is  limited, 
the  obligation,  that  is,  the  bond,  is  a  limited  obligation.  This 
is  well  illustrated  by  the  decision  of  the  Supreme  Court  of 
the  United  States  in  United  States  v.  County  of  Maconr 
The  statute  authorized  railroad-aid  bonds  and  provided  for 
the  levy  of  a  tax  to  pay  the  same  not  exceeding  one-twentieth 
of  one  per  cent  upon  the  assessed  value  of  the  taxable  prop- 
erty of  each  year.  Default  having  occurred,  the  bondholder 
recovered  judgment  upon  interest  coupons,  execution  was 
issued,  and  the  judgment  returned  unsatisfied.  The  owner  of 
the  coupons  asked  for  a  writ  of  mandamus  directing  the 
county  court  to  levy  and  collect  a  tax  for  the  purpose  of  pay- 
ing the  judgment.     Mr.  Chief  Justice  Waite  said: 

"Every  purchaser  of  a  municipal  bond  is  chargeable  with 
notice  of  the  statute  under  which  the  bond  was  issued.  If  the 
statute  gives  no  power  to  make  the  bond,  the  municipality 
is  not  bound.  So,  too,  if  the  municipality  has  no  power, 
either  by  express  grant  or  by  implication,  to  raise  money  by 
taxation  to  pay  the  bond,  the  holder  cannot  require  the  mu- 
nicipal authorities  to  levy  a  tax  for  that  purpose.  If  the 
purchaser  in  this  case  had  examined  the  statutes  under  which 
the  county  was  acting,  he  would  have  seen  what  might  prove 
to  be  difficulties  in  the  way  of  payment.  As  it  is,  he  holds 
the  obligation  of  a  debtor  who  is  unable  to  provide  the  means 
of  payment.  We  have  no  power  by  mandamus  to  compel  a 
municipal  corporation  to  levy  a  tax  which  the  law  does  not 
authorize.  We  cannot  create  new  rights  or  confer  new 
powers.  All  we  can  do  is  to  bring  existing  powers  into  opera- 
tion. In  this  case  it  appears  that  the  special  tax  of  one- 
twentieth  of  one  per  cent  has  been  regularly  levied,  collected, 
and  applied,  and  no  complaint  is  made  as  to  the  levy  of  the 
one-half  of  one  per  cent  for  general  purposes.  What  is 
wanted  is  the  levy  beyond  these  amounts,  and  that,  we  think, 
under  existing  laws  we  have  no  power  to  order.  .  .  .  We 
have  not  been  referred  to  any  statute  which  gives  a  judgment 
creditor  any  right  to  a  levy  of  taxes  which  he  did  not  have 
before  the  judgment.  The  judgment  has  the  effect  of  a 
judicial  determination  of  the  validity  of  his  demand  and  of 
M1878),  99  U.  S.  582. 


68  MUNICIPAL  BONDS 

the  amount  that  is  due,  but  it  gives  him  no  new  rights  in 
respect  to  the  means  of  payment." 

The  reasoning  of  this  opinion  has  been  followed  by  the 
courts  of  last  resort  of  several  States. 

Constitutional  limitations. — It  should  be  noted  that  if  the 
tax  limitation  is  contained  in  the  State  constitution,  the  bond- 
holder may  be  in  a  very  unpleasant  predicament  because  there 
is  no  ready  means  of  relief.  It  is  a  difficult  matter  to  amend 
State  constitutions  and  they  are  not  ordinarily  amended  to 
relieve  a  creditor.  If  the  limitation  is  by  statute,  an  appeal 
may  be  made  to  the  legislature,  which  in  a  proper  case  and 
in  the  absence  of  any  constitutional  prohibition  may  very 
properly  give  the  bondholder  relief  by  repealing  the  limita- 
tion or  raising  the  limit.  On  this  subject  Mr.  Chester  B. 
Masslich,  a  well-known  specialist,  has  said: 

"Perhaps  the  worst  form  of  tax  limitation  is  the  general 
limitation  which  fixes  the  maximum  rate  of  annual  tax  for  all 
purposes.  If  the  amount  raised  by  such  a  tax  is  insufficient 
to  pay  running  municipal  expenses  and  also  the  principal  and 
interest  of  outstanding  bonds,  the  courts  hold  that  the  pay- 
ment of  running  expense  comes  first,  and  that  the  creditors 
can  have  no  part  of  the  taxes  which  the  municipal  authorities 
in  their  discretion  choose  to  apply  to  those  expenses.  In 
other  words,  the  maintenance  of  the  life  of  a  municipality  is 
its  first  duty  and  the  courts  will  not  disturb  the  judgment  of 
its  governing  body  as  to  the  amount  necessary  for  main- 
tenance. 

"There  are  many  laws  on  the  statute  books  today  which 
fix  so  high  a  limit  upon  the  amount  of  bonds  which  may  be 
issued,  and  so  low  a  limit  upon  the  amount  of  taxes  that  may 
be  levied  to  pay  them,  that  it  is  a  foregone  conclusion  that 
the  bonds  will  not  be  enforceable  if  the  entire  amount  allowed 
by  law  be  issued.   .   .   . 

"North  Carolina  is  one  of  the  States  which  have  seen  the 
error  of  limits  upon  bond  taxes.  With  few  exceptions,  all 
the  general  and  special  laws  passed  in  that  State  in  recent 
years  granting  authority  for  bond  issues,  have  expressly  pro- 
vided that  the  tax  for  their  payment  shall  be  unlimited. 
South  Carolina  has  followed  the  same  new  policy.  Georgia 
has  long  since  removed  all  limits  upon  bond  taxes  by  consti- 
tutional enactments  which  make  mandatory  a  sufficient  levy 
without  any  limit  whatever,   and   as   a   result  the   bonds   of 


PROMISE  AND  PURPOSE  OF  BOND  69 

Georgia  counties  and  municipalities  find  a  ready  sale. 
Georgia's  taxpayers  have  not  suffered,  for  the  same  section 
of  the  constitution  which  requires  the  unlimited  tax  puts  a 
rigid  limit  upon  the  amount  of  lawful  debt  that  may  be 
created. 

"Across  the  line  from  Georgia,  Alabama  still  labours 
under  a  constitutional  limit  of  bond  taxes,  with  the  result  that 
investors  pay  little  attention  to  public  securities  coming  from 
that  State."  ^ 

Legality  independent  of  povirer  to  pay. — It  Is  a  curious 
fact  that  the  validity  and  legality  of  a  bond  may  be  inde- 
pendent of  the  power  to  pay  it.  In  one  jurisdiction  this  doc- 
trine was  at  one  time  applied.  The  Supreme  Court  of  North 
Carolina  said  In  substance  that  a  bond  may  be  In  all  respects 
validly  and  legally  Issued  and  constitute  a  valid  obligation  of 
a  munlciplity  even  though  a  sufficient  tax  levy  to  provide  for 
the  payment  of  principal  and  interest  has  not  been,  and  pos- 
sibly cannot  be,  made.^  This  ought  not  to  be  so,  and  It  is 
reassuring  to  observe  that  the  doctrine  has  been  repudiated 
In  the  same  jurisdiction.^ 

Assessment  bonds. — These  may  be  limited  to  specified 
funds.  Usually  they  are  issued  to  provide  the  funds  for  local 
improvements,  such  as  sewers  or  sidewalks.  The  property 
benefited  becomes  liable  for  all  or  part  of  the  cost  of  the 
improvement.  The  municipality  undertakes  only  to  levy  the 
assessments  which  are  to  provide  the  fund  for  repayment.  If 
the  value  of  the  property  benefited  and  liable  should  not  be 
sufficient  to  meet  the  obligation,  the  municipality  would  not 
have  any  further  liability. 

This  is  true  only  where  the  faith  and  credit  of  the  munici- 
pality are  not  pledged  to  the  payment  of  the  debt,  or  where 
the  municipality  has  not  the  power  by  statute  to  pledge  its 
faith  and  credit.  Assessment  bonds  issued  In  New  York  and 
New  Jersey  are,  as  between  the  bondholder  and  the  munici- 
pality, general  obligations  of  the  municipality,  supported  by 
its  unlimited  taxing  power.  As  between  the  municipality  and 
the  property  owner,  however,  the  property  especially  bene- 
fited must  pay  the  bonds. 

'  Quoted  in  the  Daily  Bond  Buyer,  December  5,  1921. 

*Pitt  County  V.  MacDonald  (N.  C.  1908),  148  N.  C.  125;  61  S.  E.  643. 

"Proctor  v.  Nash  County  (N.  C.  1921),  108  S.  E.  360. 


70  MUNICIPAL  BONDS 

Assessment  bonds  not  negotiable  instruments. — Where 
the  instrument  is  payable  solely  from  a  special  fund,  the  bonds 
are  not  negotiable  instruments. 

"Respecting  the  question  of  the  negotiability  of  these 
instruments,  it  has  been  held  that  because  the  bonds  are  not 
payable  unconditionally  and  at  all  events,  but  only  out  of  a 
special  fund  created  for  and  pledged  to  the  payment,  which 
may  or  may  not  prove  adequate  to  meet  the  obligations  in 
full,  they  do  not  have  that  certainty  of  payment  which  is 
essential  to  negotiability,  and  that  they  are  not  negotiable 
instruments  within  the  Law  Merchant.  Being  deprived, 
according  to  these  decisions,  of  one  of  the  characteristics  of 
negotiability  by  the  uncertainty  of  payment,  improvement 
bonds  of  this  nature  have  been  held  to  be  mere  choses  in 
action,  and  in  the  hands  of  a  purchaser  for  value,  without 
notice,  subject  to  all  the  defenses  to  which  they  are  subjected 
in  the  hands  of  the  contractor  or  person  to  whom  they  were 
originally  issued."  ® 

As  pointed  out  in  Chapter  I,  consequences  important  to 
the  bondholder  follow  the  negotiability  of  the  instrument. 
Unless  the  bond  is  fully  negotiable,  it  is  not  in  fact  a  munici- 
pal bond  as  the  term  is  employed,  and  it  should  not  sell  on 
the  same  basis  as  a  fully  negotiable  bond. 

Federal  tort  theory. — An  interesting  gloss  on  this  state- 
ment is  afforded  by  consideration  of  a  doctrine  which  Frede- 
rick P.  Delafield  has  aptly  named  the  "Federal  Tort  Theory." 
Briefly  stated,  it  is  this:  If  a  municipality  makes  a  contract 
or  issues  a  bond  payable  only  from  assessments  and  then  fails 
to  levy  the  assessments  or  to  collect  them,  the  municipality 
becomes  liable.'^  The  consequences  of  this  theory  are  ex- 
tremely interesting,  but  belong  to  a  more  exhaustive  con- 
sideration of  the  subject  than  can  be  given  here. 

In  Chapter  XI  it  is  pointed  out  that  the  bondholder  may 
obtain  the  money  represented  by  the  bond  in  an  action  on 
contract  where  the  bond  is  not  enforcible  as  such. 

Limitation  of  area. — Limitation  because  of  the  area  taxed, 
is  illustrated  by  issues  of  New  York  town  bonds  for  sewer 
purposes.  Under  the  law  ^  sewer  districts  may  be  organized 
and  the  property  within  them  assessed  to  pay  the  cost  of  the 

'Dillon,  p.  1392. 

'Barbour  Asphalt  Co.  v.  Denver  (1896),  72  Fed.  336. 

'  Cons.  Laws,  Chap.  62,  Sec.  360. 


PROMISE  AND  PURPOSE  OF  BOND  71 

improvement.  The  bonds,  however,  are  issued  by  the  town 
which  is  only  secondarily  liable  and  may  be  held  liable  only 
if  there  is  a  shortage  in  the  primary  fund. 

In  conclusion  we  may  say  that  a  true  municipal  bond  must 
contain  a  full  and  unqualified  promise  to  pay,  not  only  in 
words  but  in  contemplation  of  law.  The  opinion  of  counsel 
is  understood  to  mean  that  there  is  such  a  promise.  An  Ohio 
court  has  recently  said: 

"But  I  assume  that  'legality'  means  something  more  than 
the  mere  formality  of  issue.  It  means  the  expression  of  a 
perfect  obligation;  that  the  bonds  shall  not  be  merely  the 
expression  according  to  legal  form,  perfect  in  its  intonation 
and  following  all  the  regulations;  but  that  the  result  of  these 
formalities  shall  be  the  creation  of  an  obligation  on  the  issu- 
ing of  those  securities  that  is  perfect  so  that  the  buyer  shall 
have  no  concern  about  the  security  returning  both  his  income 
and  investment.  That,  therefore,  involves  the  construction 
of  the  entire  law  that  relates  to  the  creation  of  the  obligation 
and  in  the  opinion  of  counsel  the  limitations  which  the  laws 
of  Florida  fix  upon  a  municipality  are  such  that  in  this  case 
there  is  an  imperfect  obligation.  That  is  precisely  the  ques- 
tion intended  to  be  submitted  to  him;  so  that  he  has  expressed 
the  sentiment  of  those  who  deal  in  these  securities  and  given 
to  the  purchaser  the  opinion  of  the  profession  with  regard 
to  the  security  that  the  obligation  created.  Now  it  matters 
not  that  these  bonds  could  be  pursued  to  a  judgment.  You 
may  have  as  many  judgments  as  you  can  get,  but  only  one 
satisfaction.  It  is  not  the  ability  to  secure  a  judgment,  but 
it  is  the  perfection  of  the  security  of  the  investment  which 
constitutes  its  legality;  and  here  counsel,  in  good  faith  and 
true  to  their  client,  have  given  their  opinion  that  they  should 
not  approve  the  bonds."  ^ 

As  a  mere  matter  of  mathematics,  a  limited  tax  rate  may 
produce  ample  revenue  to  run  the  municipality  and  to  provide 
funds  for  debt  service,  but  increasing  demands  for  general 
service  or  a  conflagration  or  a  flood  may  impair  the  margin 
of  safety  or  even  destroy  the  value  of  taxable  property.  The 
municipal  revenue  may  diminish  and  as  the  municipality  must 
live  before  it  pays  its  debts,  a  default  must  inevitably  result. 

Purpose  of  issue. — Text  writers  have  classified  bonds  as 

^ A.  T.  Bell  <v.  Plant  City,  Fla.  Decision  not  reported;  Lucas  Co.,  Ohio, 
Common  Pleas,  Oct.  7,  1920. 


72  MUNICIPAL  BONDS 

to  purpose.  This  classification  has  no  meaning,  except  that 
bonds  issued  for  self-sustaining  or  partially  self-sustaining 
public  utilities  have  a  factor  of  safety  that  bonds  issued  for 
non-revenue  producing  improvements  may  not  have.  Water 
works,  especially  systems  operated  by  gravity,  should  pro- 
duce enough  revenue  to  pay  operating  expenses  and  the  in- 
terest and  principal  of  maturing  bonds.  This  is  recognized 
by  many  statutes,  which  permit  deduction  of  such  bonds  in 
computing  the  borrowing  power  of  the  municipality.  The 
same  principle  extends  to  bonds  issued  for  wharves,  docks 
and  markets.  A  familiar  example  exists  in  bonds  issued  by 
New  York  City  for  the  purpose  of  securing  funds  for  the 
construction  of  rapid  transit  facilities.  Under  properly 
drawn  statutes,  such  bonds  may  be  deducted  in  computing 
borrowing  power  only  to  the  extent  that  the  income  from 
the  utilities  provides  sufficient  funds  for  debt  service.  When 
such  income  becomes  insufficient,  the  bonds  must  be  charged 
against  the  limit  of  indebtedness.  In  a  limited  sense,  streets 
and  sewers,  schools,  hospitals  and  parks  add  to  the  revenue- 
producing  power  of  the  municipality,  but  so  very  remotely  as 
not  to  affect  the  means  of  payment  or  security  for  the  bonds. 
Term  of  bonds. — Term  in  relation  to  purpose  is  consid- 
ered in  Chapter  IX  devoted  to  term  and  serial  bonds. 


Chapter  IX 
THE  MATURITY  OF  THE  BOND 

Classification  according  to  time  of  payment. — Classifica- 
tion of  bonds  may  be  according  to  the  time  of  payment,  or 
maturity,  one  of  the  most  important  factors  in  determining 
price,  which  is  considered  in  Chapter  XIV. 

Short-term  loans. — Bonds,  certificates  of  indebtedness,  or 
notes,  running,  let  us  say,  less  than  five  years,  are  called  short- 
term  obligations,  and  are  considered  from  a  far  different 
angle  than  are  the  long-term  or  serial  bonds.  The  short-term 
loan  is  usually  self-liquidating,  being  issued  in  anticipation  of 
taxes  or  other  revenues,  and  commercially  is  treated  as  a 
liquid  asset.     Our  concern  is  not  with  short-term  loans  as  such. 

Determination  of  time  of  payment. — The  time  of  pay- 
ment of  any  bond  depends  upon  the  language  of  the  statute 
authorizing  it,  for  the  reason  that  most  statutes  prescribe  a 
maximum  maturity  for  bonds,  and  a  bond  which  purports  to 
run  for  longer  than  the  permitted  term  is  illegal.  While 
certain  classes  of  foreign  government  securities  are  not  pay- 
able at  any  definite  time,  it  has  been  the  practice,  as  well  as 
the  law,  ever  since  American  municipalities  have  been  issuing 
bonds,  to  make  them  absolutely  due  and  payable  within  a 
relatively  limited  period  of  years.  Very  few  municipal  bonds 
have  a  life  of  over  fifty  years  from  the  date  of  issue.  Con- 
sidered as  to  maturity,  bonds  are  of  two  kinds: 

Term  bonds. — Term  bonds  are  those  of  an  issue  of  which 
all  the  bonds  become  due  and  payable  at  one  time.  For 
example,  $100,000  bonds  dated  May,  1922,  may  all  mature 
and  be  due  and  payable  May  1,  1952,  in  which  case  the  term 
or  life  of  the  bond  is  30  years.  For  the  reasons  hereafter 
referred  to,  the  issue  of  term  bonds  is  becoming  less  and  less 
frequent  and  the  issue  of  serial  bonds  is  made  mandatory  by 
statute. 

Callable  bonds. — Callable  bonds,  sometimes  called  re- 
deemable or  optional  bonds,    are  term  bonds  which  may  be 

73 


74  MUNICIPAL  BONDS 

called  for  payment  before  their  maturity.  This  is  in  order 
that  the  issuing  municipality  may  redeem  its  indebtedness  if 
it  chooses  to  exercise  the  option,  without  being  obliged  to  do 
so.  Such  bonds  may  be  redeemed,  if  the  issuing  municipality 
so  decides,  15  or  any  number  of  years  after  their  issue,  but 
may  not  be  absolutely  due  and  payable  until,  for  example,  30 
years  thereafter.  A  bond  redeemable  after  15  years  and  pay- 
able at  the  end  of  30  years  after  issue  is  called  a  "15-30." 
So  a  bond  redeemable  in  5  years  and  payable  in  20  years  after 
Issue  would  be  called  a  "5-20." 

Notice  of  prior  redemption. — The  bond  form  should  con- 
tain a  provision  that  the  issuing  municipality,  if  it  desires  to 
exercise  Its  option  of  prior  redemption,  will  give  notice  to  the 
bondholder  a  certain  number  of  weeks  or  months  In  advance 
of  the  optional  date.  Provision  is  usually  made  to  give  this 
notice  by  publication  in  one  or  more  designated  financial 
newspapers.  As  a  matter  of  fact,  such  notice,  called  con- 
structive, is  not  always  brought  to  the  attention  of  the  bond- 
holder. Notice  of  Intention  to  redeem  is  intended  to  enable 
the  municipality  to  call  the  bonds  for  payment,  and  interest 
usually  stops  with  the  giving  of  such  notice.  The  notice 
also  permits  the  bondholder,  if  he  is  fortunate  enough  to 
receive  It,  to  find  a  new  Investment  for  his  money,  as  he  has 
been  warned  that  his  bonds  will  be  paid. 

The  Issue  of  callable  bonds  indicates  a  very  high  degree 
of  optimism  upon  the  part  of  the  municipal  officials.  Very 
few  of  such  bonds  are  called  for  paym.ent  before  their  ma- 
turity. They  do  not  sell  at  the  same  price  as  they  would  for 
the  term  without  the  optional  feature,  since  for  the  purpose 
of  computing  the  selling  price  or  basis,  the  bond  is  treated  as 
running  only  to  the  optional  date  and  not  to  maturity.  Thus 
a  "15-30"  bond  sells  as  though  it  were  a  15-year  term  bond. 
Such  bonds  are  not  as  desirable  as  the  straight  term  or  serial 
bond. 

Sinking  funds. — It  has  been  explained  that  bonds  are  paid 
from  the  proceeds  of  taxation.  If  a  municipality  was  per- 
mitted to  issue  a  considerable  amount  of  bonds  to  run  for 
several  years,  with  no  provision  for  the  payment  of  the  bonds 
before  they  mature,  the  amount  of  money  which  would  have 
to  be  raised  to  pay  the  bonds  in  the  year  of  their  maturity 
would  not  only  send  the  municipal  tax  rate  sky-rocketing,  but 
the  amount  might  conceivably  be  so  large  that  it  could  not  be 


THE  MATURITY  OF  THE  BOND  IS 

raised  by  taxation.  Hence,  at  an  early  period,  the  principle 
of  the  sinking  fund  was  applied  to  municipal  financing.  A 
sinking  fund  is  formed  by  setting  aside  a  sum  of  money  at 
stated  intervals  to  provide  for  the  payment  of  all  or  part  of 
the  principal  of  a  debt.  It  is  a  method  of  sinking  or  extin- 
guishing it;  a  provision  for  an  obligation  not  yet  matured. 
The  practice  may  be  illustrated  by  saying  that,  if  a  bond  runs 
for  30  years,  3  1/3%  of  the  amount  of  the  bond  is  annually 
included  in  the  tax  levy,  and  when  the  tax  is  paid,  the  amount 
is  turned  over  to  a  particular  municipal  official,  or  a  group 
of  officials,  called  the  Sinking  Fund  Commission.  Statutes 
which  permit  the  issue  of  term  bonds  require  such  provision 
for  the  payment  of  the  bonds  to  be  made.  If  the  ordinance 
or  statute  authorizing  the  bond  issue  provides  for  a  sinking 
fund,  this  provision  Is  part  of  the  contract  between  the  munici- 
pality and  the  bondholder,  and  the  rights  of  the  latter  to 
insist  upon  the  protection  of  the  sinking  fund  cannot  be  im- 
paired by  any  subsequent  legislative  enactment  ^  or  act  of  the 
issuing  municipality.  This  is  so  because  of  the  constitutional 
guarantees  against  impairing  the  obligations  of  contracts.  A 
standard  sinking  fund  clause  or  contract  follows  this  chapter, 
and  an  examination  of  it  will  show  the  principles  upon  which 
the  sinking  fund  operates. 

Annual  contributions  to  sinking  fund. — The  amount 
raised  each  year  for  sinking  fund  purposes  is  determined 
arithmetically,  and  various  tables  are  used  to  compute  the 
amount.  The  table  authorized  by  the  commissioner  of  mu- 
nicipal accounts  In  New  Jersey  computing  on  a  3^%  annual 
cumulative  basis  is  given  at  the  end  of  this  chapter  following 
the  model  sinking  fund  clause  above  referred  to.  The  annual 
sinking  fund  requirements  for  the  issue  of  term  bonds  is 
found  by  multiplying  the  amount  opposite  the  stated  term  of 
the  issue,  by  the  number  of  one-thousand-dollar  bonds;  thus, 
referring  to  the  table,  it  will  be  seen  that  if  a  one-thousand- 
dollar  bond  runs  for  five  years,  the  amount  contributed  an- 
nually will  be  $186.4814.  The  table  assumes  that  interest 
on  the  sinking  fund  Investments  will  be  compounded  semi- 
annually. The  annual  contributions  to  the  sinking  fund  must 
be  invested  promptly,  together  with  the  Interest  on  all  sinking 
fund  investments,  at  a  rate  of  return  at  least  equal  to  the 
percentage  used  in  the  table  fixing  the   annual  contribution, 

'Dillon,  p.  195. 


76  MUNICIPAL  BONDS 

in  order  to  produce  the  necessary  amount  at  the  date  of 
maturity. 

Misuse  of  sinking  funds. — Simple  as  all  this  is  in  theory, 
the  difficulty  with  the  sinking  fund  plan  is  that  it  is  not  care- 
fully followed  and  observed  except  in  the  best  municipal 
families.  "To  the  student  of  municipal  finance,  with  a  sense 
of  humour,"  says  Professor  Jordan,  "city  sinking  funds  afford 
a  subject  of  pleasurable  research.  Sinking  funds  have  been 
notoriously  misused  for  purposes  absolutely  foreign  to  their 
object.  *  *  *  Many  cities  require  that  sinking  fund  moneys 
be  used  exclusively  for  the  purchase  of  bonds  of  the  same  city, 
without  requiring  that  the  bonds  be  of  the  same  issue  as  that 
for  which  the  fund  is  created.  The  city,  desiring  money  at  a 
later  date,  figuratively  takes  some  new  bonds  out  of  its  right- 
hand  pocket  and  exchanges  them  for  sinking  fund  cash  in  its 
left-hand  pocket,  and  thereupon  proceeds  to  pay  itself  interest 
on  the  bonds.  Such  a  transaction  scarcely  belongs  to  the 
twentieth  century."  ^ 

For  a  city  to  invest  its  sinking  funds  in  its  own  securities, 
suggests  an  individual  securing  his  promissory  note  by  the 
deposit  of  another.  By  doing  so.  It  withdraws  cash  raised 
for  the  protection  of  the  bondholder.  It  is  hardly  necessary 
to  call  to  mind  the  plan  of  the  comptroller  of  the  State  of 
New  York  to  pay  the  soldiers'  bonus  from  moneys  on  hand 
In  the  sinking  fund,  and  later  to  reimburse  the  sinking  fund 
when  the  bonus  bonds  were  sold.^  This  happy  thought  was 
upset  by  a  hard-hearted  court  of  appeals  which  declared  the 
State  Bonus  Bond  Act  unconstitutional. 

Advantages  of  the  sinking  fund. — But  a  sinking  fund 
which  is  not  properly  managed,  or  of  which  the  principal  is 
not  kept  at  par,  Is  better  than  none  at  all.  The  psychological 
effect  on  the  minds  of  officials  should  not  be  ignored,  for  a 
consideration  of  sinking  fund  requirements  when  the  annual 
budget  Is  being  made  up  is  a  reminder  that  debts  must  be 
paid.  Sinking  fund  trustees  are  held  to  a  very  high  degree 
of  accountability  and  the  Investment  banker  who  merchan- 
dises an  issue  of  sinking  fund  bonds  may  well  consider  that 
he  has  at  least  a  moral  duty  to  remind  officials  that  the 
annual  contribution  must  be  raised  and  paid  in. 

One  great  advantage  which  the  sinking  fund  plan  has  is 

'Jordan  on  Investments,  p.  81. 

'  The  Daily  Bond  Buyer.  Sept.  3,  1921. 


THE  MATURITY  OF  THE  BOND  77 

that  the  annual  payments  for  interest  and  principal  remain 
constant  each  year  from  the  date  of  issue  to  the  date  of 
payment. 

Under  the  sinking  fund  plan  a  uniform  tax  rate  over  a 
period  of  years  will  pay  the  interest  and  retire  the  bonds 
when  they  become  due,  provided  the  assessed  valuation  re- 
mains constant.  As  taxable  valuations  usually  increase  rap- 
idly after  extensive  improvements  have  been  made,  there  does 
not  appear  to  be  any  particular  advantage  in  a  uniform  tax 
rate.  The  tax  rate  will  adjust  itself  to  the  valuation  of  tax- 
able property  and  the  needs  of  the  community. 

Serial  bonds. — Serial  bonds  are  those  which  mature  in 
substantially  equal  annual  installments  during  the  life  of  the 
issue.  A  certain  number  therefore  are  redeemed  annually, 
through  application  of  the  proceeds  of  taxes  raised  for  that 
purpose.  The  serial  plan  of  payment  is  an  advantage  because 
it  avoids  the  sinking  fund  which  is  frequently  open  to  so  much 
criticism. 

Equal  annual  installments. — Serial  bonds  are  frequently 
required  to  be  made  payable  in  equal  annual  installments. 
This  is  to  be  avoided  if  possible,  for  such  a  rigid  requirement 
frequently  compels  the  municipality  to  issue  bonds  of  odd 
denominations  and  sometimes  In  principal  amounts  expressed 
partly  in  cents.  For  example,  a  small  issue  payable  in  equal 
annual  installments  may  mature  $1,142.34  in  each  year.  If 
the  statute  uses  the  expression  "substantially  equal  annual 
installments,"  there  is  no  necessity  for  such  meticulous  ac- 
curacy. It  may  be  observed  that  where  all  the  bonds  of  a 
municipality  are  required  to  mature  in  the  same  number  of 
equal  annual  installments,  as  is  the  case  with  New  York  and 
Pennsylvania  second  class  cities,  a  fairly  even  debt  service 
results.  The  increased  borrowing  each  year  is  offset  by  pay- 
ments of  principal  and  increases  in  assessable  valuations. 

The  custom  of  Issuing  serial  bonds  is  becoming  Increas- 
ingly common.  It  Is  mandatory  in  Massachusetts,  New  Jer- 
sey, New  York,  North  Carolina,  and  many  other  States.  The 
price  is  based  on  the  average  of  the  price  of  each  maturity, 
figured  separately.  An  issue  maturing  one  thousand  dollars 
a  year  for  twenty  years  will  have  an  average  maturity  of 
substantially  ten  years. 

For  an  illustration  of  the  prices  of  different  maturities  of 
the  same  issue  of  bonds,  see  copy  of  the  advertisement  appear- 


78  MUNICIPAL  BONDS 

ing  on  page  144.  When  securities  sell  above  par,  the  longer 
the  maturity  the  higher  the  value  of  the  bond,  since  the  time 
is  longer  in  which  to  amortize  the  premium. 

Advantages  of  the  serial  bond. — The  great  advantage 
of  the  installment  bond  is  that  no  sinking  fund  with  its 
attendant  abuses  is  necessary  or  possible.  In  a  sense,  the 
serial  plan  is  an  automatic,  mathematically  correct  sinking 
fund.  That  is,  the  amount  required  to  be  raised  by  taxation 
each  year  for  debt  service  is  the  principal  of  the  bonds  matur- 
ing that  year  plus  the  interest  payable  during  that  year  on 
all  the  bonds  of  the  issue  then  outstanding  and  unpaid.  The 
last  table  following  this  chapter  shows  the  difference  between 
the  average  annual  cost  and  the  total  cost  of  sinking  fund 
and  serial  bonds.  In  the  table  the  sinking  fund  is  assumed 
to  be  invested  and  compounded  annually  at  3>^%  where  the 
coupon  rate  on  the  bonds  to  be  paid  is  5%.  In  practice  it 
is  doubtful  whether  any  but  the  most  expertly  managed  sink- 
ing funds  are  invested  to  yield  more  than  an  average  of 
3y2%.  Mathematically,  the  burden  of  taxation  for  the  pay- 
ment of  serial  bonds  is  identical  with  the  cost  under  the  sink- 
ing fund  plan,  if  the  sinking  fund  earns  and  is  compounded 
at  the  same  interest  rate  as  is  borne  by  the  bonds. 

Before  dismissing  the  subject  of  sinking  funds,  attention 
is  called  to  the  copy  of  the  annual  report  of  the  Sinking  Fund 
Commission  of  Clifton,  New  Jersey,  dated  December  31, 
1921,  which  follows  this  chapter.  This  is  displayed  not 
necessarily  as  being  a  model,  but  as  showing  clearly  the  opera- 
tion of  a  sinking  fund  in  a  small  city,  subject  to  extremely 
strict  statutory  regulations  of  sinking  funds. 

Deferred  serial  plan. — Under  the  serial  plan,  a  certain 
amount  of  the  bonds  is  retired  each  year,  the  interest  is  paid 
on  the  remaining  amount  outstanding,  and  the  retired  bonds 
cease  to  be  an  interest  charge  on  the  community.  The 
straight  serial  method  requires  the  heaviest  payments  for 
interest  and  retirement  of  principal  in  the  early  years  of  the 
bond  issue,  often  before  the  improvement  is  fully  completed 
or  before  it  has  yielded  the  community  any  advantage.  To 
meet  these  conditions,  which  frequently  arise,  the  use  of  the 
deferred  serial  bond  has  become  common.  With  such  a 
modified  type,  no  principal  is  retired  until  a  certain  period, 
usually  five  years,  has  elapsed.  During  this  period,  interest 
is  paid  but  nothing  more.     Thereafter,   the  principal  is  re- 


THE  MATURITY  OF  THE  BOND  79 

tired  by  uniform  amounts  and  the  interest  charges  are  met, 
just  as  in  the  case  of  serial  bonds  having  a  term  shorter  by 
five  years,  or  whatever  the  deferred  period  may  be.  In  this 
way  the  municipality  pays  nothing  but  interest  until  the  im- 
provement is  completed  and  taxes  are  levied  and  collected. 
Interest  may  be  paid  from  principal  during  the  construction 
period.  The  postponement  of  the  payment  of  principal  is 
particularly  important  when  the  bonds  are  paid  from  assess- 
ments, as  is  the  case  with  irrigation  district  or  similar  issues. 

Term  related  to  life  of  improvement. — The  statutes  of 
some  jurisdictions,  like  New  Jersey,  North  Carolina,  and 
Massachusetts,  provide  that  the  maximum  life  of  the  bonds 
shall  not  exceed  the  life  of  the  improvement,  such  life  being 
arbitrarily  determined  by  statute  or  by  the  certificate  of  an 
official,  such  as  the  city  engineer.  The  New  Jersey*  and 
North  Carolina  ^  bond  acts  contain  elaborate  provisions,  giv- 
ing the  maximum  terms  of  bonds  which  may  be  issued  for 
different  classes  of  public  improvem.ents.  Under  the  New 
Jersey  act,  for  example,  bonds  issued  for  the  construction  of 
a  fire-proof  building  (which  is  carefully  defined)  must  ma- 
ture within  forty  years  and  those  for  the  construction  of  a 
road  of  sand  or  gravel  must  mature  within  five  years. 

The  New  Jersey  and  North  Carolina  statutes  provide 
that  where  bonds  are  to  be  issued  for  more  than  one  improve- 
ment, an  average  shall  be  computed,  taking  into  consideration 
the  probable  life  of  each  improvement  and  the  amount  of 
money  required  therefor. 

It  is  believed  that  the  best  modern  thought  on  the  subject 
of  municipal  financing  requires  that  the  term  of  bond  issues 
shall  not  exceed  the  life  of  the  improvement,  so  that  the 
burden  of  the  improvement  will  not  have  to  be  borne  by  per- 
sons who  do  not  enjoy  its  benefits.  It  is  also  obvious  that  the 
longer  the  bonds  run,  the  greater  the  interest  charge,  which 
in  the  case  of  bonds  having  a  long  term,  may  greatly  exceed 
the  principal  itself. 

Sinking  Fund  Clause  or  Contract 

Until  the  principal  and  interest  of  the  bonds  shall  be  fully  paid,  there  shall 
be  raised  and  collected  annually  by  tax  upon  all  of  the  taxable  property  in  the 
municipality,  beginning  with  the  next  tax  levy  a  sum  sufficient  to  pay  the  inter- 

*P.  L.,  1817,  p.  803. 
'Appendix  B. 


80  MUNICIPAL  BONDS 

est  on  all  of  said  bonds  outstanding,  as  such  interest  becomes  due  and  a  further 
sum  to  be  paid  into  a  sinking  fund  sufficient  to  retire  said  bonds  at  maturity. 
The  amount  to  be  raised  annually  to  pay  the  interest  on  said  bonds  shall  be  not 
less  than  the  amount  of  one  year's  interest  on  the  amount  of  bonds  outstanding. 
The  amount  to  be  raised  in  the  next  annual  tax  levy  for  said  sinking  fund  shall 

be  at  least dollars  for  each  one  thousand  dollars  of  said  bonds,  and 

thereafter  the  trustees  of  the  sinking  fund  shall  each  year  ascertain  the  amount 
of  said  fund  by  appraising  the  securities  held  for  investment  therein  at  their 
fair  market  value  not  exceeding  par,  and  shall  determine  the  amount  of  money 
which,  if  thereafter  annually  contributed  to  said  fund,  would  with  the  fund  and 
with  the  accumulations  thereon  and  upon  the  contributions  thereto,  such  accumu- 
lations being  computed  at  the  rate  of  four  per  centum  per  annum,  produce  at 
the  date  of  maturity  the  amount  of  the  bonds  outstanding,  and  the  amount  of 
money  to  be  raised  and  contributed  to  said  sinking  fund  in  such  year  shall  be 
at  least  the  amount  thus  determined.  If  the  income  of  the  sinking  fund  in  any 
year  be  more  than  the  sum  which,  if  annually  added  to  the  said  fund,  would, 
with  the  fund  and  its  cumulations  as  aforesaid,  retire  the  outstanding  bonds  at 
maturity,  the  excess  income  may  then  be  applied  to  the  interest  on  the  bonds. 
If  the  sinking  fund  shall  equal  in  amount  the  bonds  outstanding,  no  further 
contributions  need  be  made  thereto  except  to  make  good  any  loss  ascertained  at 
the  annual  appraisals  and  the  income  thereof  shall  be  applied  to  the  payment 
of  the  interest  on  said  bonds.  The  sinking  fund  shall  be  separately  kept  and 
shall  be  safely  invested  under  the  direction  of  the  trustees  thereof  in  securities 
in  which  savings  banks  of  this  municipality  are  by  law  authorized  to  invest  or 
shall  be  applied  to  the  purchase  or  cancellation  of  the  bonds  aforesaid.  No 
moneys  raised  for  the  payment  of  the  principal  and  interest  of  said  bonds  shall 
be  appropriated  or  used  for  any  other  purpose. 

Table  Showing  Annual  Sinking  Fund  Requirements  for 
Each  $1,000  Bond 

Term   (years)  Amount 

1  $1,000.0000 

2  491.4005 

3  321.9342 

4  237.2511 

5  186.4814 

6  152.6682 

7  125.5445 

8  110.4767 

9  96.4460 

10  85.2414 

11  76.0920 

12  68.4840 

13  62.0616 

14  56.5707 

15  51.8251 

16  47.6848 

17  44.0431 

18  40.8168 

19  37.9403 

20  35.3611 


THE  MATURITY  OF  THE  BOND  8 

Term   (years)  Amount 

21     33.0366 

22    30.9321 

23    29.0188 

24    27.2728 

25    25.6740 

Table  Showing  Comparative  Cost  of  Serial  and  Sinking 
Fund  Plans  ^ 

$100,000  5%  BONDS 


ANNUAL 

a\t:rage  debt  service 

TOTAL 

COST 

iturtng  in 

3^2%  Sinking 

Serial 

J/4%  Sinking 

Serial 

years 

Fund 

Fund 

5 

$23,648 

$23,000 

$118,241 

$115,000 

10 

13,524 

12,750 

135,241 

127,500 

15 

10,183 

9,333 

152,738 

140,000 

20 

8,536 

7,625 

170,722 

152,500 

25 

7,567 

6,600 

189,185 

165,000 

30 

6,937 

5,917 

208,114 

177,500 

35 

6,500 

5,429 

227,494 

190,000 

40 

6,183 

5,063 

247,309 

202,500 

45 

5,945 

4,778 

267,540 

215,000 

50 

5,763 

4,550 

288,169 

227,500 

Sinking  Fund  Commission 
Clifton,  New  Jersey 

December  31,  1921. 
To  the  City  Council  of  the  City  of  Clifton, 
New  Jersey. 

Gentlemen, — In  accordance  with  the  requirements  of  the  Sinking  Fund 
Law  of  the  State  of  New  Jersey,  the  Sinking  Fund  Commission  of  the  City  of 
Clifton  herewith  transmits  its  statement  of  the  Sinking  Fund  account  for  the 
year  1921. 

BALANCE  ON  HAND  JANUARY  1,  1921 

Cash  on  Deposit,  Clifton  Trust  Co $      111.63 

$32,000  U.  S.  L.  Bonds  Second   Issue  4^ 28,934.97 

$  2,000  U.  S.  L.  Bonds  Third    Issue   4% 1,871.60 

$15,500  U.  S.  L.  Bonds  Fourth  Issue  4^4 14,733.24 

Total  Sinking  Fund,  January  1,  1921 $45,651.44 

RECEIPTS  FOR    YEAR     1921 

Mar.    21.  Interest  on  $  2,000  Third   Liberty  Bonds... $  42.50 

Apr.     18.  Interest  on  $14,000  Fourth    Liberty   Bonds..  297.50 

Apr.     18.  Interest  on  $  1,500  Fourth    Liberty    Bonds..  31.87 

May    18.  Interest  on  $32,000  Second   Liberty   Bonds..  680.01 

Sept.    23.  Interest  on  $  2,000  Third   Liberty  Bonds...  42.50 

Oct.      19.  Interest  on  $15,500  Fourth    Liberty   Bonds..  329.38 

Nov.    21.  Interest  on  $33,000  Second   Liberty   Bonds..  701.24 

Nov.      1.  Interest  on  Bank  balance  to  Nov.  1,  1921...  6.87 

°  From  Engineering  Neius-Record,  August  30,  1917. 


82  MUNICIPAL  BONDS 

1921  Appropriations  for  Sinking  Fund 

Dec.       8.  From  City  Treasurer — General    Bonds    ....     3,118.78 

Dec.       8.  From  City  Treasurer — School  Bonds    4,679.46 

Dec.       8.  From  City  Treasurer — Special  Sinking  Fund     3,772.78 


Total  Receipts  Year  1921 $13,702.89 

DISBURSEMENTS: 

July   7.    Accrued    Interest   on    purchase    $1,000    Second 

Liberty  Bonds   6.26 

Dec.  8.  Accrued  Interest  on  purchase  $13,000  Second  Lib- 
erty  Bonds    36.83 


Total  Disbursements $       43.09 

Net  Amount  Added  to  Sinking  Fund 13,659.80 


NET  SINKING  FUND  DECEMBER  31,  1921 $59,311.24 

INVESTMENTS  HELD  BY  COMMISSION 

On  December  31,  1921,  the  total   Sinking  Fund  of  $59,311.24  was  invested 
as  follows: 

$46,000  Par  Value  U.  S.  Second  Liberty  Bonds,  4^4 $42,436.22 

$  2,000  Par  Value  U.  S.     Third  Liberty  Bonds,  4J4 1,871.60 

$15,500  Par  Value  U.   S.   Fourth  Liberty  Bonds,  4^ 14,733.24 

Balance  in  Clifton  Trust  Co.,  December  31,  1921 270.18 


$59,311.24 
Average  Rate  of  Interest  on  Investments  4.57549  per  cent. 

The  following  statement  shows  the  amount  of  sinking  fund  monies 
credited  to  the  various  issues  of  long  term  bonds  as  of  December  31, 
1921,  in  comparison  with  the  amounts  that  should  have  been  available  on 
that  date  for  each  issue  under  the  law: 

Surplus  Over  Deficit  Below 
Legal   Re-      Amount  in     Legal  Require-    Legal   Re- 
quirements Sinking  Fund  ments  quirements 

GENERAL  BONDS 

$131,000  Trunk  Sewer,  4^ $19,741.34    $20,167.50    $     426.16       

$  30,000  Municipal  Bldg.,  4^'  •  •  •  •     4,520.92        4,678.79  157.87       

$  50,000  Tem.  Sew.  Bds.,  6%,  dated 

July  1,  1921 

SCHOOL  DIST.  BONDS 

$95,000  School,  4y2,  dated  May  1, 

1914    31,644.69      14,914.25       16,730.44 

$19,900  Three   Issues,   School,  45^, 

May    1,    1907 11,405.31        2,517.87       8,887.44 

$28,000   Two    Issues,    School,    5%, 

July  1,   1908 10,471.51        1,855.97      8,615.54 

SPECIAL  SINKING 

FUND 
To  wipe  out   deficit — 

School  Bonds   15,176.86      15,176.86       


$77,7S3.77    $59,311.24    $15,760.89    $34,233.42 


THE  MATURITY  OF  THE  BOND  83 


SUMMARY 

Legal  Requirements  $77,783.77 

Amount  in  Sinking  Fund $  59,311.24 

Deficit  to  be  taken  care  of  through  Special  Sinking  Fund     18,472.53 

%77,782.77 

Deficit    $34,233.42 

Surplus    15,760.89 

$18,472.53 


Annexed  to  this  report  is  detailed  information  concerning  the  funded 
indebtedness  of  the  City  of  Clifton. 

The  Sinking  Fund  Commission  has  authorized  the  Secretary  of  the  Com- 
mission to  have  this  report  printed  in  full  for  distribution  in  accordance  with 
the  Sinking  Fund  law. 

Respectfully   submitted, 

SINKING  FUND  COMMISSION: 

(Member  ex-officio) 

(Term  expires ) 

NO  APPOINTMENT 


TOTAL  BONDED  DEBT  OF  THE 
CITY  OF  CLIFTON,  N.  J. 

The  entire  bonded  debt  of  the  City  on  December  31,  1921,  was  as 
follows: 

General  Bonds: 

Temporary  Sewer  Bonds  6%,   1927 $50,000 

Trunk  Sewer  4y2's,   1945 131,000 

Trunk  Sewer  5's  Serial 25,000 

Municipal  Building  4%*s,  1945 30,000 

Total   General   Bonds $236,000 

School  Bonds: 

Sinking   Fund  Bonds $142,900 

Serial  Bonds    425,000 

Total  School  Bonds $567,900 

Total  bonded  debt  December  31,  1921 $803,900 

The  bonded  debt  of  the  City  of  Clifton  was  increased  during  the  year  1921 
by  $155,000  net. 


84  MUNICIPAL  BONDS 

STATEMENT    SHOWING    THE    AMOUNT   OF    BONDS    TO    BE 
PAID  OFF  ANNUALLY  AND  THE  AMOUNT  OF  INDEBTED- 
NESS AT  THE  END  OF  EACH    YEAR,  BASED  ON  THE 
INDEBTEDNESS   AS   OF   DECEMBER  31,   1921 


Bonds  to  be  paid      Bonded  Indebtedness 

Year                Serial  Bonds  off  through             December  31  each 

to  be  paid  off  Sinking  Fund         year  after  payments 

1922  20,000  783,900 

1923  19,500  1,000  763,400 

1924  19,500  1,000  742,900 

1925  18,000  1,500  723,400 

1926  18,000  6,000  699,400 

1927  18,000  56,000  625,400 

1928  18,000  6,000  601,400 

1929  18,500  6,000  576,900 

1930  18,500  7,000  551,400 

1931  14,000  9,000  528,400 

1932  14,000  9,000  505,400 

1933  14,000  9,000  482,400 

1934  14,000  9,000  459,400 

1935  14,000  9,000  436,400 

1936  14,000  8,400  414,000 

1937  14,000  7,000  393,000 

1938  14,000  7,000  372,000 

1939  14,000  7,000  351,000 

1940  14,000  7,000  330,000 

1941  12,000  7,000  321,000 

1942  13,000  7,000  291,000 

1943  13,000  7,000  271,000 

1944  13,000  6,000  252,000 

1945  12,500  161,000  78,500 

1946  12,000  66,500 

1947  11,000  55,500 

1948  8,000  47,500 

1949  6,000  41,500 

1950  5,000  36,500 

1951  5,000  31,500 

1952  4,500  27,000 

1953  3,000  24,000 

1954  3,000  21,000 

1955  3,000  18,000 

1956  3,000  15,000 

1957  3,000  12,000 

1958  4,000  8,000 

1959  4,000  4,000 

1960  4,000  

$450,000  $353,900 

Serial  Bonds  $450,000 

Sinking  Fund  Bonds 353,900 

Total  Bonds  $803,900 


Chapter  X 
SALE  AND  AWARD 

Actual  operation  one  of  bargain  and  sale. — While  money 
is  borrowed  by  the  municipality  and  in  contemplation  of  law 
its  bonds  issued  to  evidence  the  loan,  the  actual  operation  is 
that  of  bargain  and  sale.  Express  statutory  authority  to 
issue  bonds  implies  the  power  to  sell  them  in  the  ordinary 
and  usual  manner;  and  the  municipality  may,  by  virtue 
thereof,  sell  the  bonds  and  use  the  proceeds  for  the  purpose 
intended,  that  being  the  mode  most  generally  adopted  in  simi- 
lar cases. ^ 

Private  sale. — A  private  sale  of  bonds  as  distinguished 
from  a  public  sale  means  substantially  that  the  municipality 
is  not  required  to  give  public  notice  of  an  intended  sale  nor 
to  ask  for  competing  offers  or  bids.  Ordinarily  we  find  pri- 
vate sale  forbidden  by  statute  (because  public  sale  is  required) 
but  permitted  in  certain  cases.  When  it  is  not  expressly  for- 
bidden it  is  permissible.  As  to  short-term  paper,  public  sale 
is  not  ordinarily  required.  The  advantage  of  private  sale 
to  the  municipality  is  that  it  may  act  promptly  when  market 
conditions  are  favourable.  The  advantage  to  the  broker  is 
obviously  lack  of  competition  and  because  of  this  a  larger  pro- 
spective profit.  The  disadvantage  to  the  municipality  is  the 
possibility  of  an  unconscionable  bargain,  because  of  the  igno- 
rance of  public  officials.  While  actual  fraud  is  seldom  prac- 
ticed, it  is  obvious  that  an  alert  buyer,  fully  informed  of  mar- 
ket conditions,  is  apt  to  have  municipal  officials  at  a  decided 
disadvantage.  There  are  no  disadvantages  to  the  broker  in 
a  private  sale. 

Public  sale. — Public  sale  of  long-term  securities  is  required 
by  most  statutes.  A  public  sale  is  one  of  which  public  notice 
is  required  by  advertising.  It  is  advantageous  to  the  munici- 
pality because  free  competition  is  more  apt  to  result  in  the 
offer  of  the  market  price.    The  fact  that  there  is  competition 

*  Dillon,  p.  1398. 

85 


86  MUNICIPAL  BONDS 

and  publicity  is  a  protection  to  municipal  officials  both  against 
fraud  and  unconscionable  bargains  and  against  their  own 
credulity  or  lack  of  information. 

Bidders  may  be  requested  to  submit  propositions  for  the 
purchase  of  the  bonds: 

(a)  Naming  the  price  which  they  will  pay  for  the  entire 
issue,  in  which  case  the  award  will  be  to  the  bidder  offering 
the  most  money. 

(b)  Naming  the  lowest  interest  rate  at  which  they  will 
take  the  issue,  in  which  case  a  bidder  who  will  take  4^^  7^ 
bonds  will  secure  the  award  in  preference  to  other  bidders 
who  offer  to  take  4^%  bonds.  A  variation  of  this  plan  is 
to  ask  for  bids  at  the  lowest  interest  rate  plus  the  greatest 
premium,  (generally  the  price  above  par  one  hundred),  bid 
must  be  very  carefully  studied  and  particular  care  taken  to 
see  that  the  offer  complies  with  its  terms. 

(c)  Naming  the  least  amount  of  bonds  the  bidder  will 
take  and  pay  therefor  the  amount  necessary  to  be  raised  and 
a  premium  in  addition.     This  form  of  bid  is  discussed  later. 

Disadvantages  of  a  public  sale. — A  public  sale  has  its  dis- 
advantages. The  period  of  advertising  the  notice  of  sale  is 
ordinarily  too  long.  To  secure  needed  publicity,  a  week  or 
more  must  elapse  between  the  public  offering  and  the  receipt 
of  bids,  and  the  award.  The  lapse  of  time  may  result  in  the 
loss  of  an  advantageous  market.  It  may  also  work  the  other 
way.  In  determining  the  proposed  interest  rate,  a  forecast 
must  be  made  of  the  market  conditions  likely  to  obtain  at 
and  after  the  time  of  sale.  In  1920  a  very  large  offering  by 
an  eastern  municipality  was  being  advertised  just  as  the  Bol- 
shevist army  threatened  to  enter  Warsaw.  By  the  day  of 
sale  the  threatened  danger  to  Warsaw  had  passed  and  the 
ensuing  feeling  of  optimism  resulted  in  a  premium  so  large 
that  as  it  turned  out  the  bonds  would  have  sold  at  a  lower 
interest  rate. 

Public  notice. — Where  public  notice  is  required,  a  mistake 
in  advertising  may  make  the  sale  irregular.  Re-advertising 
must  follow  the  statutory  course.  Thus  an  advantageous 
market  may  be  lost. 

The  New  York  statute  governing  public  sale.^ — The  New 
York  statute  governing  public  sale  is  typical  of  the  provisions 
found  In  most  jurisdictions.  "All  bonds  hereafter  issued  by 
any  municipal  corporation,  or  by  any  school  district  or  civil 


SALE  AND  AlVARD  87 

division  of  the  State,  shall  be  sold,  in  the  case  of  a  cit}'  of 
the  first  class  as  required  by  its  charter  or  by  any  special  act 
under  which  such  bonds  are  issued,  in  the  case  of  a  city  of  the 
second  class  as  required  by  section  sixty-one  of  the  second 
class  cities  law,  and  in  all  other  cases  at  public  sale  not  less 
than  five  or  more  than  thirt}'  days  after  a  notice  of  such  sale, 
stating  the  amount,  date,  maturity  and  rate  of  interest,  has 
been  published  at  least  once  in  the  official  paper  or  papers,  if 
any,  of  any  such  municipality,  provided  that  if  there  is  no 
official  paper,  then  such  notice  of  sale  shall  be  published  in  a 
newspaper  published  in  the  county  in  which  such  bonds  are  to 
be  issued,  or  a  copy  thereof  shall  be  sent  to  and  published  in  a 
financial  newspaper  published  and  circulating  in  New  York 
City."  - 

The  New  Jersey  plan. — New  Jersey  has  evolved  a  plan 
peculiarly  its  own.  It  has  been  observed  by  students  of  mu- 
nicipal finance  that  municipalities  have  not  always  applied  the 
premium,  the  price  above  par  (generally  one  hundred)  bid 
for  the  bonds,  to  the  purpose  for  which  the  bonds  are  issued. 
Instances  of  gross  abuse  have  been  common.  Some  years 
ago,  a  New  York  city,  desiring  to  obtain  money  for  cur- 
rent expenses,  refunded  a  large  amount  of  its  debt  and  de- 
liberately made  the  interest  rate  much  higher  than  market 
conditions  required.  A  large  premium  resulted,  and  instead 
of  being  applied  to  the  purpose  for  which  the  bonds  were 
issued  or  placed  in  the  sinking  fund,  this  premium  found  its 
way  into  the  municipal  till  and  was  used  for  current  expenses. 
To  prevent  this  sort  of  thing,  the  New  Jersey  statute  ^  now 
provides  that  the  notice  of  sale  must  state  the  amount  of 
money  necessary  to  be  raised.  The  bidder  is  required  to  state 
the  number  of  bonds  he  will  take,  bidding  therefor  the  amount 
of  money  necessary  to  be  raised  and  an  additional  sum  of 
less  than  one  thousand  dollars.  Suppose,  for  instance,  that 
one  hundred  bonds  of  one  thousand  dollars  each  are  offered 
for  sale  and  the  amount  of  money  required  to  be  raised  is  one 
hundred  thousand  dollars.  A  bidder  may  offer  to  pay  one 
hundred  thousand  nine  hundred  dollars  and  to  take  therefor 
ninety-nine  bonds.  This  plan  has  worked  advantageously  in 
practice  and  has  resulted  in  abolishing  premiums  of  more  than 
nominal  amounts. 

^  Cons.  Laws,  Chap.  24,  Sec.  9. 
^P.  L.  1917,  p.  803,  as  amended. 


88  MUNICIPAL  BONDS 

Par  means  the  amount  of  the  face  of  the  bonds  and 
accrued  interest  from  the  date  of  the  bonds  to  the  date  of 
delivery.  Most  statutes  require  that  sales  be  made  at  not  less 
than  par.  It  is  clear  that  unless  a  controlling  statute  provides 
to  the  contrary,  a  municipal  bond  may  be  sold  at  any  price 
not  so  low  as  to  make  the  sale  usurious.'* 

Persons  purchasing  the  bonds  from  the  municipality  are 
bound  to  take  notice  of  the  power  of  the  municipality  in  this 
respect,  and  a  sale  of  bonds  at  less  than  par  is  absolutely 
void  between  the  parties  if  expressly  prohibited  by  law. 
Neither  party  to  the  contract  is  bound  thereby,  and  it  cannot 
be  the  subject  of  a  valid  claim  by  either  against  the  other.^ 
If  the  bonds  are  paid  for  and  in  the  hands  of  the  original 
purchaser,  the  court  would  compel  their  surrender  and  pro- 
vide for  a  refund  of  the  purchase  price.  Note,  however,  that 
this  is  true  only  as  between  the  parties.  Our  old  friend  the 
bona  fide  holder  for  value  and  without  notice  is  protected  if 
the  bond  is  in  fact  a  negotiable  instrument  and  the  munici- 
pality has  the  power  to  issue  it. 

Par  sale. — Par  sale  requirements  seem  to  involve  an  eco- 
nomic fallacy.  Money  is  a  commodity  and  the  price  of  money 
is  governed  by  the  conditions  existing  at  the  time  it  is  bought. 
It  may  be  said  that  the  interest  rate  borne  by  the  bonds  and 
the  market  rate  never  correspond.  It  is,  therefore,  necessary, 
to  be  sure  of  obtaining  bids,  to  fix  the  interest  rate  higher 
than  the  market.  The  bonds  may  then  sell  for  a  premium. 
Theoretically,  if  the  premium  is  properly  applied,  that  is, 
paid  into  a  sinking  fund  and  properly  invested,  it  reduces  the 
interest  rate  to  the  market  rate.  In  practice,  this  rarely  hap- 
pens. Par  sales  statutes  are  designed  to  compel  the  payment 
of  a  fair  price  for  bonds  and  possibly  to  protect  the  reputa- 
tion of  municipal  officials  against  charges  of  making  bad  bar- 
gains or  fraudulent  bargains.  Sale  after  public  notice  does 
undoubtedly  prevent  Intentional  or  unintentional  abuse  of 
power  by  public  officials. 

Evasion  of  such  requirements. — During  the  early  part  of 
the  year  1921,  many  smaller  municipalities  found  it  difficult 
to  sell  their  shorter-term  bonds  at  a  six  per  cent  interest  rate, 
the  highest  rate  permitted  by  statute.  Most  eastern  statutes, 
and  probably  most  bond  acts,  prescribe  a  maximum  interest 

*K!ernan  v.  City  of  Portland  (Ore,  1912),  122  Pac.  764. 
'  Dillon,  p.  1400. 


SALE  AND  AWARD  89 

rate  of  six  per  cent.  If  a  six  per  cent  bond  is  not  worth  par 
and  the  niunicipality  cannot  legally  pay  more  than  six  per 
cent,  the  irresistible  force  of  market  conditions  meets  the  im- 
movable wall  of  statute,  without,  however,  always  producing 
an  impasse.  In  other  words,  par  sale  statutes  are  frequently 
evaded. 

Fiscal  agency  contracts. — These  are  popular  in  some  parts 
of  the  country.  By  fiscal  agency  contract  is  not  meant  the 
bona  fide  contract  whereby  a  banking  institution  acts  as  the 
disbursing  agent  for  interest  and  principal,  the  bank  some- 
times acting  as  depositary,^  but  substantially  that  the  bond 
house  offers,  for  a  consideration,  to  buy  the  bonds  at  a  certain 
price  at  private  sale  or  to  bid  not  less  than  a  certain  price  at 
public  sale,  to  furnish  all  legal  advice  necessary  in  connection 
with  the  issue  and  to  prepare  the  printed  bonds  for  execution. 
This  is  substantially  what  is  known  in  some  parts  of  the  coun- 
try as  a  proceedings  contract,  by  which  the  bond  house  offers 
certain  services  and  receives  a  lump  sum  sufficient  to  permit 
it  to  make  a  reasonable,  or  sometimes  unreasonable,  profit  on 
the  bonds  at  the  highest  interest  rate  permitted  by  law.  The 
legality  of  such  contracts  is  at  least  questionable. 

The  deposit  agreement. — As  a  method  of  evasion  of  par 
statutes,  the  deposit  agreement  has  come  into  vogue  within 
recent  years.  This  form  of  contract  includes  an  agreement  to 
deposit  the  purchase  price  of  the  bonds  with  or  in  a  par- 
ticular depositary  or  to  permit  the  purchaser  to  retain  the 
purchase  money  and  pay  it  over  at  fixed  times  in  the  future 
or  upon  request.  The  advantage  derived  is  that  the  pur- 
chaser obtains  the  interest  earned  by  the  deposited  purchase 
price,  either  in  gross  or  in  part,  for  such  time  as  the  deposit 
remains. 

The  legality  of  such  an  agreement  may  turn  on  whether 
the  purchaser  is  or  is  not  a  proper  depositary  for  municipal 
funds,  as  a  bank  in  the  same  State  would  be  ordinarily.  If 
the  purchaser  is  a  depositary  bank  and  the  fund  may  be  with- 
drawn at  any  time  and  before  withdrawal  earns  interest  as 
other  municipal  funds,  the  deposit  is  lawful.  If  the  agree- 
ment is  that  the  fund  remain  for  a  specified  period,  or  earn 
less  than  usual  interest,  then  either  the  sale  is  a  sale  on  credit 
and  void  for  that  reason  ^  or  the  provision  of  this  agreement 

"Chamberlain,  p.  519. 

'Illinois  V.  Delafield  (1840),  8  Paige  (N.  Y.)  526. 


90  MUNICIPAL  BONDS 

that  the  fund  is  not  to  be  withdrawn  is  unenforceable.  If  the 
purchaser  is  not  a  depositary  and  cannot  qualify  as  such, 
because  of  statutory  or  other  restrictions,  the  agreement  is 
void  as  a  sale  on  credit.^  In  any  event,  these  questions  can 
affect  only  the  immediate  parties  to  the  transaction,  i.e.,  the 
municipal  officials  and  the  purchasing  bond  house.  The  pur- 
chaser without  notice  takes  title  free  from  infirmities  in  the 
contract  of  sale. 

Meeting  the  expense  of  issuing  bonds. — Expenses  in- 
curred in  issuing  bonds  may  ordinarily  be  paid  out  of  the  pro- 
ceeds of  sale  notwithstanding  a  prohibition  of  a  sale  below 
par,^  but  this  depends  on  the  statute  pursuant  to  which  the 
bonds  are  issued.  The  extent  to  which  an  allowance  may  be 
made  to  the  purchaser  for  his  expenses  is  not  clear.  Bona 
fide  expenses  incident  to  the  issue  of  the  bonds,  such  as  print- 
ing and  engraving,  seem  to  be  allowable.  Allowance  of  other 
expenses  including  attorneys'  fees  is  in  doubt.  If  a  claim  for 
expenses  is  unreasonable  in  amount  or  is  made  a  cloak  for  a 
deduction  from  the  purchase  price,  it  is  clearly  illegal. ^°  If 
the  expenses  allowed  the  purchaser  are  legitimate,  the  pay- 
ment of  such  expenses  would  probably  be  sustained  but  not  if 
merely  a  device  to  effect  a  sale  below  par. 

Brokerage  and  commissions. — These  are  allowable  if  bona 
fide  but  not  if  made  a  device  to  evade  the  statutory  require- 
ment of  a  par  sale.  The  power  of  a  municipality  to  issue  and 
sell  bonds  carries  with  it  the  implied  power  to  secure  such 
reasonable  and  necessary  assistance  as  may  be  requisite  to 
bring  about  an  advantageous  sale,  and  to  this  end  the  munici- 
pality, acting  in  good  faith,  may  employ  a  broker  regularly 
engaged  in  the  business. ^^  This  does  not  mean,  however,  that 
the  bond  house  may  be  both  the  broker  and  the  customer. 
The  investment  banker  ordinarily  buys  for  his  own  account, 
both  ostensibly  and  in  fact.  If  the  bond  house  desires  to  act 
as  a  broker,  disclose  the  name  of  its  purchaser  to  the  munici- 
pality, and  have  the  award  made  to  its  customer,  it  can  claim 
a  reasonable  brokerage.  The  difficulty  is  that  the  bond  house 
is  not  willing  to  do  this.  There  is  some  confusion  in  the  deci- 
sions as  to  whether  an  agent  may  be  employed  only  in   an 

'Illinois  v.  Delafield  (1840),  8  Paige  (N.  Y.)   526. 
"LeRoy  v.  Elizabeth  City  (N.  C.  1914),  81  S.  E.  1072;  166  N.  C.  93. 
'"Uhler  v.  City  of  Olympia  (Wash.  1915),  151  Pac.  117;  87  Wash.  1. 
"Dillon,  p.  1399. 


SALE  AND  AWARD  91 

emergency  as  where  the  bonds  have  been  offered  for  sale  at 
the  highest  permitted  interest  rate  without  finding  a  pur- 
chaser. It  is  contended,  however,  that  an  agent  may  be  em- 
ployed when  his  services  are  reasonably  required.  The  ques- 
tion may  be  raised  whether  the  commission  of  an  agent  should 
be  paid  from  the  proceeds  of  the  bond  issue  or  from  some 
other  available  funds.  There  is  considerable  difference  of 
opinion  on  this  point  but  the  question  in  theory  seems  only 
from  which  pocket  the  payment  be  made.  Practically,  the 
statute  must  be  consulted. 

In  concluding  this  discussion  of  par  sales  or  sales  at  less 
than  par,  it  should  be  repeated  that  a  sale  of  bonds  at  less 
than  par,  contrary  to  a  statutory  direction,  does  not  affect  the 
fundamental  power  of  the  municipality  to  make  and  issue  the 
bonds;  it  is  a  mere  irregularity  in  the  exercise  of  its  powers, 
and  the  validity  of  the  bonds  in  the  hands  of  innocent  pur- 
chasers for  value  is  not  affected  thereby. ^- 

Plan  of  sale  important  to  bidder  and  those  in  charge  of 
sale. — The  plan  of  sale  determined  upon  should  be  carefully 
considered  by  the  prospective  bidder  and  the  conditions  upon 
which  bids  are  canvassed  should  also  be  carefully  studied  by 
those  in  charge  of  the  sale.  The  bid  must  be  responsive  to 
the  advertisement.  If  it  contains  matter  not  properly  respon- 
sive to  the  advertisement,  it  is  usually  a  qualified  bid  and  may 
be  thrown  out  by  the  officials  in  charge  of  the  sale. 

Illustrations  of  notices  of  sale. — Illustrations  of  notices 
of  sale  in  New  York  and  New  Jersey  and  the  corresponding 
forms  of  bids  follow  this  chapter. 

"Dillon,  p.  1401. 


92  MUNICIPAL  BONDS 


Notice  of  Sale  of  New  York  Union  Free  School 
District  Bonds 

NOTICE  OF  SALE 

$245,000  SCHOOL  BONDS 

UNION  FREE  SCHOOL  DISTRICT  NO.  8 

OF  THE  TOWN  OF  ORANGETOWN,  NEW  YORK 

Sealed  proposals  will  be  received  by  The  Board  of  Education  of  Union 
Free  School  District  No.  8  of  the  Town  of  Orangetown,  of  the  County  of 
Rockland,  New  York,  on  October  4,  1921,  at  8  P.M.  o'clock  at  the  Schoolhouse, 
Pearl  River,  New  York,  for  the  purchase  of  $245,000  School  Bonds  of  said 
Board.  Said  bonds  will  be  of  the  denomination  of  $500  each,  will  be  dated 
November  1,  1921,  and  will  mature: 


^  7,000  on  November  1 
8,000  on  November  1 
9,000  on  November  1 
10,000  on  November  1 
11,000  on  November  1 
12,000  on  November  1 
13,000  on  November  1 
14,000  on  November  1 
15,000  on  November  1 
16,000  on  November  1 
17,000  on  November  1 
18,000  on  November  1 
17,000  on  November  1 


1922  to  1924 

1925  and  1926 

1927  and  1928 

1929 

1930  and  1931 

1932 

1933 

1934 

1935 

1936 

1937 

1938  to  1940 

1941. 


Said  bonds  will  bear  interest  at  the  rate  of  six  per  cent  (6%)  per  annum, 
payable  semi-annually  on  the  first  days  of  May  and  November  in  each  year. 
Both  principal  and  interest  will  be  payable  in  lawful  money  of  the  United 
States  of  America  at  First  National  Bank  of  Pearl  River,  Pearl  River,  New 
York.  The  bonds  will  be  coupon  bonds,  with  the  privilege  of  registration  as  to 
both  principal  and  interest. 

The  right  is  reserved  to  reject  all  bids,  and  any  bid  not  complying  with  the 
terms  of  this  notice  will  be  rejected. 

The  bonds  will  not  be  sold  for  less  than  par  and  in  addition  to  the  amount 
bid  the  successful  bidder  must  pay  accrued  interest  at  the  rate  borne  by  the 
bonds  from  the  date  of  the  bonds  to  the  date  of  payment  of  the  purchase  price. 

All  bidders  are  required  to  deposit  a  certified  check  payable  to  the  order 
of  said  Board  of  Education  for  two  per  centum  of  the  amount  of  bonds  bid  for, 
drawn  upon  an  incorporated  bank  or  trust  company.  Checks  of  unsuccessful 
bidders  will  be  returned  upon  the  award  of  the  bonds.  No  interest  will  be 
allowed  upon  the  amount  of  the  check  of  a  successful  bidder  and  such  check 
will  be  retained  to  be  applied  in  part  payment  for  the  bonds  or  to  secure  the 
board  against  any  loss  resulting  from  the  failure  of  the  bidder  to  comply  with 
the  terms  of  his  bid. 

Proposals  should  be  addressed  to  James  B.  Moore,  Clerk  of  the  Board  of 
Education,  Pearl  River,  New  York,  and  enclosed  in  a  sealed  envelope  marked 
on  the  outside  'Troposal  for  Bonds." 


SALE  AND  AWARD  93 

The    successful    bidder    will    be    furnished    with    the    opinion    of    Messrs. 

of  New  York  City,  that  the  bonds  are  bind- 
ing and  legal  obligations  of  the  board. 

The  bonds  will  be  prepared  under  the  supervision  of  the  United  States 
Mortgage  &  Trust  Company,  which  will  certify  as  to  the  genuineness  of  the 
signatures  of  the  officials  and  the  seal  impressed  thereon. 

By  order  of  the  Board  of  Education. 
Dated,  September  21,  1921. 

JAMES  B.  MOORE, 
Clerk  of  the  Board  of  Education. 


Form  of  Proposal  for  Such  Bonds,  Pursuant  to  the  Fore- 
going Notice  of  Sale 

PROPOSAL  FOR  BONDS 


October  ,  1921. 

BOARD  OF  EDUCATION, 

Union  Free  School  District  No.  8, 

In  the  Town  of  Orangetown,  Pearl  River,  New  York. 
Sirs: 

Subject  to  the  provisions  of  the  annexed  notice  of  sale,  which  is  made  a 
part  of  this  proposal,  we  offer  to  purchase  the  bonds  of  the  issue  described  in 
such  notice  and  we  offer  to  pay  therefor  $ 

In  addition  to  the  amount  above  stated  we  will  pay  accrued  interest  at  the 
rate  borne  by  the  bonds  from  the  date  of  the  bonds  to  the  date  of  payment  of 
the  purchase  price. 

We  enclose  herewith  certified  check  payable  to  the  order  of  the  Board  of 
Education  of  U.  F.  S.  D.  No.  8  of  the  Town  of  Orangetown,  in  the  sum  of 
$  ,  being  2%  of  the  par  value  of  the  bonds  bid  for,  which 

check  is  to  be  applied  in  accordance  with  the  terms  of  said  notice. 


Notice  of  Sale  of  Bonds  of  a  New  Jersey  City 

JERSEY  CITY,  NEW  JERSEY 

NOTICE  OF  SALE 

$2,275,000  GENERAL  IMPROVEMENT  BONDS 
$1,892,000  WATER  BONDS 

Sealed  proposals  will  be  received  by  the  Director  of  the  Department  of 
Revenue  and  Finance  of  the  City  of  Jersey  City,  New  Jersey,  on  September  7, 
1921,  at  12  o'clock  noon  at  the  City  Hall  in  said  City  for  the  purchase  of  the 
following  issues  of  bonds,  the   amount  of  the  issue  stated  in  each  case  being 


94  MUNICIPAL  BONDS 

the  authorized  amount  of  bonds  and  the  sum  required  to  be  obtained  at  the  sale 
of  such  issue: 

$2,275,000  General  Improvement  Bonds  maturing  $62,000  on  September  1 
in  each  of  the  years  1922  to  1939  inclusive,  and  $61,000  on  September  1  in  each 
of  the  years  1940  to  1958  inclusive. 

$1,892,000  Water  Bonds,  maturing  $49,000  on  September  1  in  each  of  the 
years  1922  to  1941  inclusive,  and  $48,000  on  September  1  in  each  of  the  years 
1942  to  1960  inclusive. 

Said  bonds  will  be  dated  September  1,  1921,  will  be  of  the  denomination 
of  $1000  each,  will  bear  interest  at  the  rate  of  five  and  one-half  per  centum 
(55^%)  per  annum,  payable  semi-annually  on  the  first  days  of  March  and 
September  in  each  year.  Both  principal  and  interest  of  said  bonds  will  be 
payable  in  lawful  money  of  the  United  States  of  America  at  the  office  of  The 
Treasurer  of  said  City.  The  bonds  will  be  coupon  bonds,  with  the  privilege  of 
registration  as  to  principal  only  or  as  to  both  principal  and  interest. 

No  more  bonds  of  each  issue  will  be  sold  than  will  produce  a  sum  equal 
to  the  authorized  amount  of  such  issue  and  an  additional  sum  of  less  than 
$1000.  Unless  all  bids  are  rejected,  each  of  said  issues  will  be  sold  to  the 
bidder  or  bidders  complying  with  the  terms  of  sale  and  offering  to  pay  not  less 
than  the  sum  required  to  be  obtained  at  the  sale  of  such  issue,  and  to  take 
therefor  the  least  amount  of  bonds,  commencing  with  the  first  maturity  (stated 
in  a  multiple  of  $1000)  ;  and  if  two  or  more  bidders  offer  to  take  the  same 
amount  of  such  bonds,  then  to  the  bidder  or  bidders  offering  to  pay  therefor  the 
highest  additional  price.  The  right  is  reserved  to  reject  all  bids  and  any  bid 
not  complying  with  the  terms  of  this  notice  will  be  rejected. 

In  addition  to  the  amount  bid  the  purchaser  must  pay  accrued  interest  at 
the  rate  borne  by  the  bonds  from  the  date  of  the  bonds  to  the  date  of  payment 
of  the  purchase  price. 

Any  bidder  may  condition  his  bid  on  the  award  to  him  of  two  or  more 
of  said  issues  but  in  that  case  if  there  is  a  more  favorable  bidder  for  any  one 
of  the  issues  for  which  he  bids,  his  bid  will  be  rejected. 

All  bidders  are  required  to  deposit  a  certified  check  payable  to  the  order 
of  The  Treasurer  of  Jersey  City,  New  Jersey,  for  two  per  centum  of  the  amount 
of  bonds  bid  for,  drawn  upon  an  incorporated  bank  or  trust  company.  Checks 
of  unsuccessful  bidders  will  be  returned  upon  the  award  of  the  bonds.  No 
interest  will  be  allowed  upon  the  amount  of  the  check  of  a  successful  bidder, 
and  such  check  will  be  retained  to  be  applied  in  part  payment  for  the  bonds  or 
to  secure  the  City  against  any  loss  resulting  from  the  failure  of  the  bidder  to 
comply  with  the  terms  of  his  bid. 

Proposals  should  be  addressed  to  James  F.  Gannon,  Jr.,  Commissioner  of 
the  Department  of  Revenue  and  Finance,  Jersey  City,  New  Jersey,  and  en- 
closed in  a  sealed  envelope  marked  on  the  outside  "Proposals  for  Bonds." 

The    successful    bidder    will    be    furnished    with    the    opinion    of    Messrs. 

of  New  York  City,  that  the  bonds  are  bind- 
ing and  legal  obligations  of  the  City. 

The  bonds  will  be  prepared  under  the  supervision  of  the  United  States 
Mortgage  &  Trust  Company,  which  will  certify  as  to  the  genuineness  of  the 
signatures  of  the  officials  and  the  seal  impressed  thereon. 

By  order  of  the  Board  of  Commissioners. 

Dated,  August  16,  1921 

Director  of  the  Department  of 
Revenue  and  Finance. 


SALE  AND  AWARD  95 

Form  of  Proposal  for  Such  Bonds,  Pursuant  to  the  Fore- 
going Notice  of  Sale 

PROPOSAL  FOR  BONDS 

Dated,  ,  19 

Mr,  James  F.  Gannon,  Jr., 

Commissioner  of  the  Department  of  Revenue  and  Finance, 
Jersey  City,  New  Jersey. 
Sir: 

Subject  to  the  provisions  of  the  annexed  Notice  of  Sale,  which  is  made  a 
part  of  this  Proposal,  we  offer  to  purchase  bonds  of  the  issues  described  in  such 
notice,  in  the  principal  amounts  stated  below,  the  bonds  bid  for  being  those  of 
each  issue  first  to  mature: 

Of  the  $2,275,000  General  Improvement  Bonds 

We  offer  to  purchase  $ 

We  offer  to  pay  therefor  $ 

Of  the  $1,892,000  Water  Bonds 

We  offer  to  purchase  $ 

We  offer  to  pay   therefor  $ 

In  addition  to  the  amounts  above  stated  we  will  pay  accrued  interest  at 
the  rate  borne  by  the  bonds  from  the  date  of  the  bonds  to  the  date  of  payment 
of  the  purchase  price. 

This  bid  is  conditioned  on  the  award  to  us,  in  accord- 
ance with  this  bid,  of  all  or  none  of  the  bonds  bid  for. 
(The    bidder    must 

strike    out    one    of  This  bid  is  a  separate  and  distinct  bid  for  each  of  the 

these    pafagraphs.)  said  issues,  and  any  one  of  said  issues  may  be  awarded 

to  us. 

We  enclose  herewith  certified  check  payable  to  the  order  of  The  Treasurer 
of  Jersey  City,  New  Jersey,  in  the  sum  of  $  being  two  per  centum 

(2%)   of  the  par  value  of  the  bonds  bid  for  which  check  is  to  be  applied  in 
accordance  with  such  notice. 


Chapter  XI 
DEFAULT,  AND  REMEDY  OF  BONDHOLDERS 

Default. — A  very  able  lawyer  once  said  to  the  writer  that 
the  real  question  involved  in  corporate  and  municipal  financ- 
ing was,  "what  happens  if  there^is  a  default."  The  careful 
investment  banker  as  well  as  the  investor  must  have  the  con- 
sequences of  default  constantly  in  mind. 

A  default  occurs  when  the  interest  on  or  the  principal  of 
a  bond  is  not  paid  when  due.  It  is  of  interest  to  note  that 
default  in  the  payment  of  interest  on  municipal  bonds  has  no 
effect  upon  the  maturity  of  the  principal.  Default  in  the  pay- 
ment of  interest  on  a  corporate  bond  generally  makes  the 
principal  payable  immediately.  This  is  not  so  in  the  case  of 
municipal  bonds.  A  default  in  the  payment  of  one  coupon, 
or  interest  due  on  a  specific  date,  does  not  make  the  principal 
payable  nor  does  default  in  the  payment  of  one  or  more  serial 
bonds  cause  the  remainder  of  the  series  to  become  due  and 
payable. 

Former  cases  of  default. — A  very  large  number  of  munici- 
palities have  defaulted  in  the  payment  of  their  bonds  and 
other  obligations,  but  such  defaults  are  now  comparatively 
infrequent.  A  list  of  510  cases  in  which  municipal  bond 
issues  have  been  held  illegal,  and  in  regard  to  which  there 
was,  it  is  to  be  presumed,  a  default,  is  contained  in  a  book 
entitled,  "Municipal  Bonds  Held  Void,"  published  in  1911 
by  Maurice  B.  Dean.  In  249  of  the  cases  in  that  list,  the 
bonds  were  held  void  after  they  had  been  issued. 

It  would  be  very  difficult  to  prepare  a  complete  list  of 
repudiations  of  municipal  bonds,  arising  from  financial  incom- 
petency or  bad  faith.  A  number  of  such  defaults  are  referred 
to  in  Chamberlain,^  Jordan  -  and  Raymond.^  In  addition 
to  the  cases  referred  to  by  these  authors,  the  following  may 
be  mentioned: 

^  Chamberlain,  pp.  235,  236. 

'Jordan,  p.  83. 

'  Raymond,  pp.  153,  156. 

96 


DEFAULT,  AND  REMEDY  OF  BONDHOLDERS     97 

In  1872  the  debt  of  the  City  of  Watertown,  Wisconsin, 
was  $750,000,  and  the  assessed  valuation  of  its  property  was 
a  little  over  $1,000,000,  so  that  it  was  practically  impossible 
for  the  city  to  pay  its  debt.^ 

In  the  years  following  1876,  the  City  of  Elizabeth  made 
extensive  improvements,  many  of  which  were  merely  aids  to 
real  estate  speculations,  assessed  the  cost  upon  property  bene- 
fited, and  issued  bonds  against  the  assessments.  The  assess- 
ments were  held  to  be  invalid,  and  the  debt  was  too  great  to 
be  paid  from  the  proceeds  of  general  taxes.  In  1879  the  debt 
of  the  city  was  so  large  it  would  have  required  annual  taxa- 
tion at  the  rate  of  six  per  cent  to  meet  the  city's  obligations 
for  interest  and  current  expenses.^  It  is  gratifying  to  record 
that  such  indebtedness  of  this  city  has  long  since  been  adjusted 
and  its  bonds  are  now  legal  investments  for  savings  banks 
and  trustees  in  the  State  of  New  York. 

The  Daily  Bond  Buyer  of  August  29,  1921,  prints  the 
following: 

"The  City  of  Victor,  Colorado,  has  been  ordered  by 
U.  S.  District  Judge  Robert  E.  Lewis  of  Denver  to  raise 
$38,000  by  taxation  to  pay  a  judgment  in  favour  of  the  First 
National  Bank  of  Ithaca,  N.  Y.  This  judgment  was  obtained, 
it  is  stated,  as  a  result  of  a  suit  brought  to  compel  payment 
on  bonds  issued  by  the  city  in  1915  on  which  neither  principal 
nor  interest  had  been  paid." 

Reasons  for  default. — Reasons  for  default  are  the  inability 
or  the  unwillingness  of  the  municipality  to  pay  its  debts.  In- 
ability may  follow  a  judgment  of  a  court  of  competent  juris- 
diction declaring  proceedings  prior  to  issue  irregular  and  the 
bonds  invalid,  in  which  case  no  tax  can  be  levied  to  pay  them. 

A  limited  tax  rate  may  exist,  beyond  which  the  munici- 
pality may  not  go,  or  there  may  have  been  a  marked  shrinkage 
in  assessed  valuation  of  taxable  property.  Repeating  what 
has  been  said  before  as  to  the  effect  of  a  limited  tax  rate,  it 
is  obvious  that  if  such  a  limit  exists  and  the  assessed  valuation 
of  taxable  property  remains  fairly  constant,  a  fixed  amount  of 
revenue  will  be  derived  each  year.  The  municipality  must 
live  before  its  debts  are  paid,  and  in  practically  all  jurisdic- 
tions (with  the  possible  exception  of  Ohio),  this  is  settled 
law.     If  there  is  not  enough  money  left  after  the  munici- 

*Rees  'v.  City  of  Watertoivn  (1873),  19  Wall.  107  at  110. 
"Dillon,  p.  2512. 


98  MUNICIPAL  BONDS 

pality's  running  expenses  are  paid,  to  care  for  debt  service, 
so  much  the  worse  for  the  bondholder. 

Mr.  Chester  B.  Masshch  has  the  following  to  say  about 
the  effect  of  tax  limits: 

"It  must  be  remembered  that  a  tax  limit  which  appears  to 
be  sufficient  at  the  time  of  the  issuance  of  a  public  security 
may  presently  become  insufficient,  Alabama  has  had  exactly 
that  experience.  Assessed  valuations  change  from  year  to 
year.  Sometimes  they  change  because  property  values  have 
increased  or  decreased,  but  in  many  States  they  have  changed 
by  fiat  of  the  legislature,  which  has  established  a  different 
basis  of  taxation  and  a  different  ratio  between  actual  values 
and  assessed  values.  Investors  are  well  acquainted  with  the 
fact  that  these  changes  have  sometimes  been  made  on  a  down- 
ward scale.  In  Kentucky,  where  a  constitutional  limitation 
of  bond  taxes  still  prevails,  a  school  district  issued  a  com- 
paratively small  amount  of  bonds  when  its  assessed  valuation 
was  about  $1,500,000.  Long  before  those  bonds  fell  due,  it 
became  unprofitable  further  to  develop  the  natural  resources 
that  had  given  the  district  its  prosperity,  and  the  assessed 
valuation  fell  to  about  $375,000.  The  50-cent  tax  rate 
allowed  by  the  State  constitution  would  no  longer  produce 
the  amount  necessary  to  pay  the  interest  and  provide  for  a 
sinking  fund,  and  the  bondholders  were  compelled  to  com- 
promise. Many  such  illustrations  can  be  given  in  many  States. 
In  one  prosperous  Alabama  city,  where  no  question  was 
raised  as  to  the  legality  of  any  bonds  it  had  issued,  the 
authorities  were  able  to  effect  a  compromise  which  gave  the 
bondholders  new  bonds  at  half  the  face  value  of  the  outstand- 
ing bonds  and  at  only  3  per  cent  interest.  Only  one  bond  issue 
of  that  city  escaped  the  general  disaster,  through  the  fact  that 
it  constituted  a  lien  upon  public  property,  and  the  bondholders 
took  possession  of  that  property  under  order  of  the  United 
States  courts.   *   *   * 

"There  are  communities  in  the  United  States,  which, 
abhorring  the  very  thought  of  repudiation,  have  nevertheless 
been  compelled  to  repudiate  and  compromise  because  the 
maximum  limits  of  taxes  they  were  permitted  to  levy  have 
not  been  sufficient  to  meet  their  debts.  One  of  the  greatest 
American  cities  suffered  this  dishonour,  but  rose  in  its  might 
and  demanded  and  obtained  a  constitutional  amendment  for 
itself  alone,  empowering  it  to  levy  sufficient  taxes  to  pay  its 


DEFAULT,  AND  REMEDY  OF  BONDHOLDERS     99 

creditors.  It  was  many  years,  however,  before  it  could  out- 
live the  effects  of  that  dishonour.  The  laws  permitting  invest- 
ment of  funds  of  savings  banks  in  New  York  and  the  various 
New  England  States,  make  it  a  condition  of  such  investments 
that  no  default  shall  have  occurred  within  a  given  long  period. 
Investors  remember  these  defaults.  They  are  sensible  of  the 
reasons  why  the  defaults  occurred  and  they  are  not  anxious 
again  to  put  themselves  into  a  position  which  makes  the  pay- 
ment of  their  bonds  dependent  upon  the  continued  prosperity 
of  the  city  or  county  which  issued  them."  ° 

Shrinkage  of  assessed  valuation  is  by  no  means  unknown. 
The  fiscal  history  of  the  mining  towns  of  the  Rocky  Mountain 
region  is  familiar  to  most  students  of  municipal  finance.  Rep- 
resentatives of  St.  Michel  de  Laval,  Quebec,  reported  to  the 
proper  provincial  authority  that  the  assessed  valuation  of  the 
taxable  property  had  shrunk  in  a  few  years  from  nearly 
$9,000,000  to  a  little  over  $2,000,000,  and  that  the  munici- 
pahty  had  a  debt  of  $2,500,000. 

Bad  faith. — Unwillingness  to  pay  may  result  from  various 
causes.  Pomeroy,  Ohio,  in  1910,  defaulted  on  its  largest 
issue  of  refunding  6s.  The  reason  ascribed  was,  that  the 
bonds  were  not  callable;  but  the  village  fathers  felt  they 
would  like  to  retire  the  bonds,  and  took  this  means  of  accom- 
pHshing  their  purpose.'^  Unwillingness  to  pay  almost  invar- 
iably involves  bad  faith.  In  the  cases  where  the  proceeds  of 
the  bond  issue  have  never  been  received  by  the  municipality, 
but  remain  in  the  pockets  of  unscrupulous  promoters  or  de- 
faulting officials,  it  is  difficult  not  to  have  some  sympathy  with 
the  taxpayer. 

To  sum  up,  a  recent  writer,  discussing  defenses  to  actions 
brought  to  enforce  the  payment  of  municipal  bonds,  has  the 
following  to  say: 

"Absence  of  legal  authority  for  the  issuance  of  such  obli- 
gations at  the  time  of  their  issuance  is  always  available,  as  a 
defense,  except  in  case  of  legislative  ratification;  but  there  can 
be  no  such  ratification  if  any  constitutional  provision  would 
be  thereby  violated.  Fraud  or  other  official  misconduct  or 
delinquency  in  the  issuance  of  the  bonds,  under  an  existing 
legal  authority,  or  an  excessive  issue,  or  misapplication  of  the 

*The  Daily  Bond  Buyer,  December  5,   1921,   quoting  from   an   article   by 
Mr.  Masslich  in  Good  Roads. 
'  Chamberlain,  p.  235. 


100  MUNICIPAL  BONDS 

bonds,  or  of  their  proceeds  to  an  illegal  or  unauthorized  pur- 
pose, or  improper  execution  of  the  bonds,  or  other  irregulari- 
ties or  omissions  in  the  statutory  requirements,  may  or  may 
not  be  available  as  defenses,  depending  upon  the  facts  and 
circumstances  of  the  cases  as  they  arise."  ^ 

The  remedy  of  the  bondholder. — Under  the  title,  "Set- 
thng  a  Default  in  the  Pioneer  Days,"  a  financial  newspaper 
prints  the  following: 

"Defaults  of  some  western  municipalities  recall  former 
difficulties  that  have  been  experienced  in  the  history  of  Ca- 
nadian municipal  finance.  Perhaps  the  most  dramatic  settle- 
ment between  a  group  of  bondholders  and  a  defaulting  mu- 
nicipality was  arranged  about  thirty  years  ago  between  Port- 
age la  Prairie  and  an  agent  who  was  sent  out  to  interview 
the  city  when  it  failed  to  meet  its  interest  payments. 

"When  the  agent  arrived,  a  meeting  of  the  townspeople 
was  called.  He  asked  tTiem  what  they  intended  to  do  about 
paying  their  debts.  The  mayor  of  the  town  replied  that  the 
civic  treasury  was  empty  and  the  debts  could  not  be  paid  at 
the  moment. 

"  'If  you  do  not  meet  your  debenture  payments  at  once, 
you  will  get  a  sheriff's  order  to  seize  every  building  in  town,' 
was  the  ultimatum  of  the  financial  man. 

"The  mayor  and  the  leading  townspeople  held  a  hurried 
consultation.  The  mayor  announced  to  the  agent:  'Go  to 
it,  old  boy.  Get  your  sheriff's  order.  But  we  warn  you 
that  before  you  have  had  time  to  put  it  into  execution  we 
will  organize  the  biggest  moving  bee  that  has  ever  been  seen 
on  the  prairies.  We'll  drag  every  building  in  town  over  to 
the  next  townslte,  change  the  name  of  the  town,  and  let  you 
have  what's  left.' 

"A  settlement  was  hastily  arranged,  the  town's  debts  being 
consolidated  and  extended  over  a  term  of  years.  That  was 
civic  finance  in  the  early  days  of  the  wild  West."  ^ 

In  ascertaining  the  rights  and  remedies  of  municipal 
creditors,  special  reference  must  always  be  had  to  the  legis- 
lation pursuant  to  which  the  debts  were  created.  If  the  leg- 
islature authorizes  the  creation  of  a  debt  and  provides  no 
special  mode  for  Its  payment,  it  is  a  sound  proposition  that 
it  was  Intended  that  it  should  be  paid  in  the  usual  way  in 

'Harris,  "The  Law  Governing  Municipal  Bonds,"  p.  279. 
"The  Daily  Bond  Buyer,  June  4,  1921. 


DEFAULT,  AND  REMEDY  OF  BONDHOLDERS   101 

which  such  debts  are  paid,  viz.,  by  the  levy  and  collection  of 
a  tax  for  that  purpose,  if  there  is  nothing  to  rebut  such 
intention.^" 

We  have  seen  that  the  powers  of  municipalities  are  de- 
rived from  statutes  and  that  such  statutes  must  be  carefully 
construed.  Hence,  it  is  necessary  when  we  consider  the 
enforcement  of  a  municipality's  contract  liability,  to  pay  care- 
ful attention  to  the  legislation  authorizing  it,  and  especially 
to  legislation  intended  to  provide  means  to  meet  the  obliga- 
tion. It  must  also  be  remembered  that  the  right  to  issue 
bonds  is  not  the  normal  means  of  raising  money.  The  normal 
method  is  the  levying  and  collection  of  taxes. 

Bonds  are  not  Hens.  Seldom  does  a  city  bond  have  a 
prior  lien  upon,  nor  is  it  secured  by  any  definite  property. 
Statements  on  the  part  of  over-enthusiastic  bond  salesmen  to 
the  effect  that  city  bonds  are  secured  by  a  prior  lien  upon  all 
the  property  of  the  city,  are  far  from  the  truth.  In  no  part 
of  the  country  except  New  England  does  possible  default  in 
payment  even  suggest  the  attachment  of  property.  Munici- 
pal bonds  are  rarely  secured  by  a  mortgage  of  specific  prop- 
erty; no  instance  of  such  security  for  eastern  municipal  bonds 
occurs  to  the  writer. 

Creditors  must  be  paid  from  the  proceeds  of  taxes.  If 
municipal  officials  will  not  or  cannot  levy  taxes  In  sufficient 
amount  to  pay  the  creditors  of  the  municipality,  the  aid  of  the 
courts  must  be  sought.  The  proper  proceeding  by  the  credi- 
tor is  to  apply  to  the  court  having  jurisdiction,  usually  a 
Federal  court,  for  a  writ  of  mandamus,  addressed  to  the  mu- 
nicipal authorities,  directing  them  to  levy  and  collect  a  suf- 
ficient tax  to  pay  the  claim.  A  writ  of  mandamus  is  in  sub- 
stance an  order  or  direction  of  the  court  to  compel  the  per- 
formance of  ministerial  functions  by  officials  who  have  no 
discretion  to  refuse  to  act  in  the  manner  directed.  The  courts 
will  not  direct  that  such  a  writ  be  Issued  if  there  is  a  plain 
and  complete  remedy  by  the  ordinary  process  of  the  law,  and 
it  has,  therefore,  been  generally  held  that  if  the  creditor 
brings  suit  against  the  corporation,  and  obtains  a  judgment 
for  a  sum  of  money,  the  writ  of  mandamus  will  not  be  issued 
to  compel  payment.  This  holds  true  only  when  there  is  some 
other  way  of  enforcing  and  rendering  the  judgment  effectual.^^ 

"  Dillon,  p.  2688. 
"  Dillon,  p.  2677. 


102  MUNICIPAL  BONDS 

Judgments  must  be  obtained. — Ordinarily,  the  municipal 
creditor  must  obtain  a  judgment  which  conclusively  establishes 
the  amount  due  him.^-  This  is  the  practice  in  the  Federal 
courts.  When  the  sheriff  or  corresponding  proper  officer 
says  that  there  is  no  property  which  he  can  attach  or  secure 
to  satisfy  the  judgment,  then  a  writ  of  mandamus  may  be 
issued.  There  is  no  necessity  for  obtaining  a  prior  judgment 
if  the  bondholder,  according  to  the  statute,  is  expressly  en- 
titled to  a  levy  of  a  special  tax  to  pay  his  bond.  If  the 
duty  of  levying  it  has  been  neglected  or  refused,  it  is  not  nec- 
essary that  an  execution  should  in  such  case  be  secured  and 
returned  unsatisfied,  in  order  to  entitle  the  judgment  creditor 
to  a  writ  of  mandamus. ^-"^  When  the  claim  is  reduced  to  judg- 
ment, the  duty  to  provide  for  its  payment  becomes  perfect, 
and  if  the  claim  can  be  paid  in  no  other  way,  it  must  be  met 
by  the  levy  and  collection  of  a  sufficient  tax  for  that  purpose. 
As  has  been  said,  this  duty  will  be  enforced  by  the  courts.^"* 
If  the  order  of  the  court  is  not  obeyed,  the  delinquent  officials 
may  be,  and  in  many  cases  have  been,  committed  to  jail  for 
contempt  of  court. 

Effect  of  limited  tax  rate. — The  courts  will  not  enlarge  the 
statutory  powers  of  the  municipal  officials  to  levy  taxes.  If 
there  be  a  limited  tax  rate  the  municipal  officials  may  be 
ordered  to  tax  the  limit  permitted  by  law,  but  may  not  be 
ordered  to  exceed  it.  This  is  true  where  the  limit  applies 
to  a  special  or  particular  tax  for  the  payment  of  the  bonds, 
or  where  it  applies  to  all  municipal  levies  to  provide  funds 
for  the  running  expenses  and  debt  service  of  the  municipality. 
The  courts  will  not  legislate  for  the  bondholder. 

Contracts  with  the  bondholder. — The  statutes  authoriz- 
ing the  issue  and  the  levy  of  taxes  for  the  payment  of  bonds 
are  parts  of  the  contract  between  the  municipality  and  its 
bondholders.  Hence  the  courts  will  grant  writs  of  mandamus 
to  compel  the  levy  of  taxes  to  the  full  limit  in  force  when  the 
debt  was  created,  although  a  subsequent  constitutional  restric- 
tion on  the  amount  of  taxes  which  may  be  levied  has  become 
operative. i'^  The  Federal  Constitution  prohibits  impairment 
of  contracts. 

"Dillon,  p.  2690. 
"Dillon,  p.  2691. 
"Dillon,  p.  2679. 
"Dillon,  p.  2685,  note. 


DEFAULT,  AND  REMEDY  OF  BONDHOLDERS    103 

Actions  based  upon  the  contract  evidenced  by  the  bond 
may  in  some  cases  be  brought  by  the  bondholders.  A  munici- 
pal corporation  may  be  sued  if  it  fails  to  perform  its  con- 
tracts, upon  a  contract  within  the  scope  of  the  powers  of  the 
corporation  and  duly  entered  into  by  the  proper  officers  as 
agents.  Municipal  corporations  are  liable  in  the  same  man- 
ner and  to  the  same  extent  as  private  corporations  or  natural 
persons.  They  are  not  liable  on  contracts  beyond  their 
powers  or  bound  by  contracts  by  unauthorized  officers  or 
agents. ^*'' 

Municipal  corporations  are  likewise  liable  to  actions  on 
implied  contract.  So  a  bona  fide  purchaser  of  a  city's  bonds, 
which  are  apparently  valid  but  which  are  wholly  void  may, 
it  has  been  held  by  the  courts,  recover  the  money  paid  for 
the  bonds.  The  cases  on  the  implied  liability  of  municipal 
corporations  "run  on  nice  lines  of  distinction"  and  turn  on  the 
constitutional  and  statutory  provisions  involved  and  the 
facts. ^"  It  is  not  possible  to  generalize,  and  it  must  be  re- 
membered that  even  though  a  judgment  be  recovered,  the 
judgment  must  be  paid  from  the  proceeds  of  taxation.  If 
the  power  to  tax  is  limited,  a  judgment  may  be  uncoUectable. 

The  question  is  sometimes  asked  whether  receivers  can 
be  appointed  in  the  case  of  defaulting  municipal  corpora- 
tions. They  cannot  be.  The  appointment  of  the  receiver  is 
an  equitable  remedy,  and  equitable  remedies  are  given  by  the 
court  only  when  the  legal  remedy  is  inadequate.  As  has  been 
pointed  out,  the  remedy  of  the  bondholder  in  case  of  default 
is  to  obtain  a  judgment  and  obtain  an  order  of  the  court, 
called  a  writ  of  mandamus,  directing  the  proper  officials  to 
levy  a  sufficient  tax  to  pay  the  bond.  If  a  sufficient  tax  cannot 
be  levied  because  of  limitations,  the  bondholder  is  out  of 
luck.  The  operation  to  enforce  the  order  of  the  court  direct- 
ing municipal  officials  to  collect  sufficient  taxes  does  not  need 
the  aid  of  a  receiver.  Furthermore,  municipal  bonds  are  not 
liens  upon  municipal  properties,  that  Is,  the  public  buildings, 
water  and  sewer  systems,  parks  and  lands  owned  by  the  issu- 
ing political  unit.  Hence  the  income  from  such  properties 
cannot  be  applied  to  debt  service  except  to  the  extent  that 
the  income  may,  pursuant  to  proper  statutory  authority,  be 
pledged  in  advance  to  the  payment  of  the  bonds.     The  author 

"Dillon,  pp.  2810-11. 

"  Dillon,  pp.  2823-24  and  note. 


104  MUNICIPAL  BONDS 

knows  of  no  case  in  this  country  where  a  receiver  has  been 
appointed,  although  appHcations  have  been  made  in  a  few 
instances  for  the  appointment  of  a  receiver.  It  is  probably 
true  that  in  Canada  it  is  possible  under  existing  legislation 
for  the  provincial  authorities  to  step  in  and  administer  the 
affairs  of  a  defaulting  municipality,  but  this  is  only  because 
of  the  statute  authorizing  such  procedure.  Admirable  as  this 
provision  may  be,  the  idea  of  such  direct  intervention  is  not 
in  accord  with  American  ideas  of  municipal  and  State 
government. 

Legislative  relief. — Legislative  relief  is  sometimes  ac- 
corded the  bondholder,  but  the  claim  and  the  debt  may  not 
be  such  as  the  law  recognizes  as  a  legal  obligation.  It  is 
possible  for  the  legislature  to  compel  municipal  corporations 
to  recognize  debts  or  claims,  not  binding  in  strict  law,  which 
for  technical  reasons  cannot  be  otherwise  enforced,  but  which 
nevertheless  are  just  and  equitable  in  their  character,  and 
involve  a  moral  obligation. ^^  Constitutional  limitations, 
whether  they  be  limitations  on  the  tax  rate  or  the  amount  of 
debt  to  be  incurred,  cannot  be  brushed  aside  by  legislatures, 
and  if  such  restrictions  prevent  payment,  legislatures  are 
powerless  to  afford  relief. 

But  when  all  is  said  and  done,  there  can  be  no  further 
assurance  of  good  faith  given  investors  in  municipal  bonds 
than  the  simple  statement  that  no  American  municipality  of 
any  importance  has  defaulted  in  recent  years  on  the  principal 
or  interest  of  any  of  its  obligations.^^ 

"Dillon,  p.  222. 

"  Chamberlain,  p.  23. 


Chapter  XII 
BONDS  AS  INVESTMENTS 

Definition. — To  make  an  investment,  implies  divesting 
one's  self  of  the  possession  and  control  of  one's  assets  and 
granting  such  possession  and  control  to  another.  Stated  in 
more  specific  language,  we  mean  that  when  we  make  an  in- 
vestment, we  take  our  money  and  turn  it  over  to  somebody 
else  in  return  for  a  promise  to  repay  the  money  loaned  and 
to  pay  interest  for  the  use  of  the  money  so  paid  over.  The 
word  "loan"  is  the  practical  equivalent. 

In  common  parlance,  a  purchase  of  stock  is  called  an  in- 
vestment, but  it  is  not  really  an  investment  because  there  is  no 
promise  that  the  money  used  will  be  returned  at  a  stated  time. 
A  person  who  buys  stock  and  becomes  a  stockholder  becomes 
a  joint  adventurer;  he  is  not  a  creditor.  A  partner  in  a  busi- 
ness concern  may  contribute  a  part  of  the  capital  employed  in 
the  business,  and  he  is  not,  under  ordinary  conditions,  a 
creditor.  His  right  to  withdraw. his  contribution  is,  there- 
fore, always  subject  to  the  prior  right  of  other  creditors  who 
have  extended  credit  to  the  partnership.  Consequently,  in 
the  sense  in  which  we  are  using  the  term,  a  partner  is  not  an 
investor. 

On  the  other  hand,  a  purchaser  of  securities  which  are 
ordinarily  regarded  as  the  proper  media  for  investment,  may 
be  a  speculator.  Such  a  purchaser  takes  the  interest  earned 
as  an  incident,  but  expects  that  his  profit  will  come  from  a 
rise  in  value  of  the  security.  Speculation  and  investment  are 
actuated  by  the  same  motive:  desire  for  gain,  and  the  dif- 
ference between  them  is  the  difference  in  degree  of  risk  the 
individual  is  willing  to  assume.  It  is  ordinarily  true  that  the 
greater  the  return  upon  an  amount  invested  or  adventured, 
the  greater  possibility  there  is  that  the  principal  may  be  lost. 
Conversely,  the  greater  the  certainty  is  that  the  principal  will 
be  returned,  in  accord  with  the  promise,  the  smaller  the  return, 
will  be. 

105 


106  MUNICIPAL  BONDS 

The  ideal  investment. — An  ideal  investment  is  described 
by  Chamberlain^  as  follows:  "If  an  investor  has  obtained 
(1)  security  for  his  principal,  (2)  a  fixed  or  definite  interest, 
(3)  a  fair  return  in  income,  and  (4)  an  investment  which  is 
salable  without  difficulty,  and  (5)  is  acceptable  as  collateral, 
and  (6)  is  free  from  direct  tax,  and  (7)  requires  almost  no 
care,  and  (8)  matures  after  a  satisfactory  lapse  of  time,  and 
(9)  is  in  convenient  units  of  denomination,  and  (10)  has  as 
good  a  chance  of  appreciating  as  of  depreciating  as  its  quali- 
ties become  more  generally  recognized, — that  man  is  to  be 
felicitated." 

This  author  also  says:  "that  any  investment  which  will 
measure  up  to  the  standard  of  these  qualities  mentioned  is 
well-nigh  ideal." 

Municipal  bonds  as  ideal  investment. — Municipal  bonds 
possess  all  of  the  characteristics  of  a  good  investment,  except 
the  possible  factor  of  appreciation  in  value  as  maturity  is 
approached.  A  bond  purchased  at  a  discount  from  par  will 
appreciate  in  value  as  maturity  approaches,  but  a  premium 
bond  depreciates,  although  market  conditions  may  increase  its 
value  for  a  period. 

Applying  the  tests  of  a  good  investment  to  municipal 
bonds  and  at  the  same  time  defining  our  terms  we  find: 

Security  of  principal. — This  means  that,  within  the  bounds 
of  reason,  the  principal  will  be  returned  to  the  lender  at  the 
time  agreed  upon  or  that  it  can  be  converted  at  will  or  at  a 
fixed  time  into  some  equivalent  form  of  wealth,  equal  in  value 
and  equally  satisfactory  to  the  lender.  Municipal  bonds  are 
due  and  payable  at  an  agreed  time,  and  although  as  we  have 
seen,  there  have  been  municipal  defaults  (and  the  possibility 
of  such  default  ought  always  to  be  in  the  mind  of  the  invest- 
ment banker  and  the  bond  buyer),  the  percentage  of  such 
defaults  is  very  low  indeed. 

Stability  of  income. — The  municipal  bond  bears  interest 
at  a  fixed  rate  per  cent  ordinarily  payable  semi-annually.  The 
amount  received  on  each  of  the  semi-annual  interest  dates  is 
the  same  and  is  not  subject  to  abatement  or  fluctuation.  It 
is  paid  at  regular  intervals  in  predetermined  amounts.  The 
interest  on  municipal  bonds  is  ordinarily  paid  promptly,  for 
municipal  credit  depends  to  a  large  extent  upon  promptness. 
A  coupon,  when  detached  and  cancelled,  is  a  promise,  inde- 

*  Chamberlain,  pp.  27-28, 


BONDS  AS  INVESTMENTS  107 

pendent  of  the  promise  of  the  bond,  to  pay  the  amount  of 
money  called  for. 

Fair  income  return. — The  question  as  to  what  constitutes 
a,  fair  return  on  the  income  invested,  depends  upon  many 
factors.  All  other  things  being  equal,  the  income  return 
varies  inversely  as  the  security.  When  the  factor  of  safety 
Is  considered,  the  income  return  on  the  average  municipal 
bond  (which  may  be  greater  or  less  than  the  coupon  or  stated 
interest  rate)  will  be  found  to  be  In  very  close  accord  with  the 
market  value  of  money. 

Marketability. — By  this  we  mean  salabllity  without  loss  of 
time  hunting  for  a  purchaser.  We  mean  something  which  has 
a  ready  market;  which  can  be  quickly  sold  and  converted  Into 
money.  The  Koh-i-noor  and  the  Cullinan  diamonds  possess 
great  value,  but  neither  stone  is  marketable  because  of  its 
enormous  value  and  the  limited  number  of  people  who  could 
afford  to  buy  It.  To  be  marketable,  then,  the  selling  price  of 
a  commodity  must  be  such  as  not  to  be  prohibitive,  and  the 
demand  must  be  more  or  less  constant.  It  Is  a  fact  that 
municipal  bonds  possess  a  very  high  degree  of  marketability. 
Tax  exemption. — In  the  last  analysis,  all  wealth  Is  taxed, 
and  It  is  a  question  only  of  the  directness  of  its  imposition:  of 
the  incidence  of  taxation,  as  the  economists  say.  But  the 
Incidence  of  taxation  Is  so  unequal  that  one  may  often  profit 
by  knowledge  of  the  working  of  this  unequallty,  or  at  least 
he  may  secure  his  Investment  from  unforeseen  levies  by  the 
provisions  of  his  Investment  contract,  or  by  taking  advantage 
of  the  provisions  of  statutory  law.  We  will  consider  tax 
exemption  more  in  detail  later  on.  It  is  sufficient  to  say  at 
this  point  that  the  municipal  bond  is  ordinarily  tax-exempt  in 
the  State  of  issue,  and  always  exempt  from  Federal  impo- 
sitions. 

Exemption  from  care. — Funds  on  deposit  are  subject  to 
changing  rates  of  interest.  Mortgages  require  attention  to 
many  details,  such  as  verification  of  the  payment  of  taxes  and 
care  that  repairs  are  made  to  avoid  depreciation  of  the  mort- 
gaged property.  Real  estate  requires  constant  attention,  for 
the  collection  of  rents,  the  making  of  repairs  and  alterations, 
and  betterments  for  tenants.  A  bond  which  Is  registered  as 
to  principal  and  Interest,  on  which  the  owner  receives  the 
interest  by  check  at  stated  periods,  or  from  which  he  may 
detach  the  coupons  and  cash  them,  requires  little  care.    A  safe 


108  MUNICIPAL  BONDS 

deposit  box  for  the  registered  bond,  and  semi-annual  visits 
to  it  in  the  case  of  the  coupon  bond,  represent  all  the  care  that 
is  necessary  for  the  bond  if  the  bond  has  been  wisely  selected 
in  every  respect. 

Acceptable  duration. — The  investor,  if  an  individual,  does 
not  care  particularly  about  changing  the  character  of  his  in- 
vestments, and  prefers  that  they  remain  constant  for  periods 
of  shorter  or  greater  duration.  Investments  for  individuals 
may  be  said  to  be  for  a  lifetime.  Where  no  question  of  depre- 
ciation of  security  is  involved,  a  term  of  from  twenty  to  fifty 
years  is  not  too  long,  and  it  is  generally  true  that  investors 
prefer  the  longer-  to  the  shorter-term  bond.  Trustees  and 
executors  have  particular  requirements  which  depend  upon  the 
terms  of  the  trusts  pursuant  to  which  they  are  acting.  While 
the  tendency  has  been  to  shorten  the  term  of  municipal  bonds, 
and  while  new  issues  of  municipal  bonds  rarely  have  an  aver- 
age term  of  more  than  twenty  years,  it  is  possible  for  any 
kind  of  an  investor  to  select  a  bond  having  a  term  which 
meets  his  particular  needs. 

Acceptable  denomination. — Municipal  bonds  are  ordina- 
rily of  the  denomination  of  $1,000  each,  although  there  are 
many  bonds  of  smaller  denominations  (called  "baby  bonds") 
offered  in  the  market  from  time  to  time.  The  denomination 
of  $1,000  is  an  easy  one  in  which  to  make  computations  and 
is  the  accepted  denomination  in  the  market. 

Potential  appreciation. — By  this  we  mean  possible  increase 
in  value  of  the  principal.  The  possibilities  of  appreciation  In 
speculation  are  without  limit,  but  such  appreciation  is  a  de- 
sirable, although  not  a  necessary,  incident  of  a  good  invest- 
ment. Property  secured  by  a  mortgage  is  apt  to  depreciate 
in  value  unless  current  repairs  are  promptly  made.  Obso- 
lescence, by  which  is  meant  a  change  in  mode  of  operation 
which  renders  changes  necessary  in  buildings  or  machinery, 
may  destroy  the  security.  Obsolescence  is  not  a  factor  as  to 
municipal  bonds,  being  cared  for  by  serial  payments  of  prin- 
cipal or  the  accumulation  of  a  sinking  fund. 

If  the  value  of  the  bond  increases,  so  much  the  better  for 
the  bondholder.  If  a  bond  is  purchased  at  a  discount,  more 
than  the  purchase  price  is  returned  at  maturity;  hence  it 
appreciates.  If  it  Is  purchased  at  a  premium,  less  is  returned; 
hence  it  depreciates  in  value.  It  is  therefore  obvious  that  any 
bond,  municipal  or  corporate,  cannot  much  appreciate,  and  as 


BONDS  AS  INVESTMENTS  109 

its  maturity  date  draws  near,  its  value  approaches  par.  For  a 
more  adequate  treatment  of  this  subject,  the  student  is  referred 
to  the  admirable  discussion  in  Professor  Jordan's  work  on 
"Investments,"  entitled  "Mathematics  of  Investments." 

Investments  by  fiduciaries. — Trustees  and  executors  of 
estates,  guardians  of  minor  children,  and  committees  for  in- 
competent persons,  are  held  to  a  very  strict  accountability  for 
the  funds  entrusted  to  their  care  and  management.  It  has 
seemed  wise  to  the  lawmakers  of  many  States  specifically  to 
define  the  kind  of  investments  which  such  fiduciaries  can  make. 
A  reference  to  the  statutes  of  all  the  States  is  not  possible 
here,  but  the  general  principles  may  be  inferred  from  an 
examination  of  the  statutes  of  New  York.  While  such  statu- 
tory regulations  are  intended  to  secure  trust  funds  against 
loss,  it  must  be  remembered  that  the  test  of  the  character  of 
investment  is  entirely  within  the  judgment  of  the  legislatures 
of  the  various  States,  and  their  requirements  may  appear  to 
be  arbitrary,  but  the  legislatures  are  the  judges. 

Savings  banks  in  New  York  may  invest  the  moneys  de- 
posited therein  in  the  following  securities,  among  others: 

(a)  The  stocks,  bonds,  interest-bearing  obligations  or 
revenue  notes  sold  at  a  discount,  of  any  city,  county,  town, 
village,  school  district,  union  free-school  district  or  poor  dis- 
trict in  New  York  State,  provided  that  they  were  issued  pur- 
suant to  law  and  that  the  faith  and  credit  of  the  municipality 
or  district  that  issued  them  is  pledged  for  their  payment. 

(b)  The  stocks  or  bonds  of  any  incorporated  city, 
county,  village  or  town  situated  in  one  of  the  States  which 
adjoins  the  State  of  New  York,  if  its  indebtedness  together 
with  the  indebtedness  of  any  district  or  other  municipal  cor- 
poration or  subdivision,  except  the  county  included  therein, 
less  its  water  debt  and  sinking  fund,  is  seven  per  cent  or  less 
of  its  assessed  valuation.  The  bonds  of  counties  are  legal 
investments  if  their  indebtedness  less  sinking  funds  is  within 
seven  per  cent  of  the  taxable  property. 

(c)  The  stocks  or  bonds  of  any  incorporated  city,  situ- 
ated in  other  of  the  States  of  the  United  States  which  were 
admitted  to  statehood  prior  to  Januaiy,  1896,  and  which 
since  January,  1861,  has  not  defaulted,  provided  such  city 
has  a  population  of  not  less  than  45,000  inhabitants,  has  been 
incorporated  at  least  twenty-five  years,  and  has  not,  since 
January  1,  1878,  defaulted  for  more  than  ninety  days  in  the 


no  MUNICIPAL  BONDS 

payment  of  principal  or  interest  of  its  indebtedness,  or  ef- 
fected any  compromise  with  the  holders  thereof.  If  the 
indebtedness  of  such  city  has  been  paid,  refunded  or  compro- 
mised, then  a  new  period  as  to  default  begins  to  run.  The 
limitation  on  indebtedness,  which  must  include  any  district, 
other  municipal  corporation  or  subdivision,  except  a  county, 
wholly  or  partly  included  therein,  less  its  water  debt  and  sink- 
ing funds,  may  not  exceed  seven  per  cent.- 

Fiduciaries  may  invest  in  any  security  In  which  a  savings 
bank  may  invest  its  funds. ^ 

The  New  York  State  superintendent  of  banks  each  year 
issues  a  list  of  cities,  counties,  etc.,  the  bonds  of  which  are 
"legal  investments,"  having  made  during  the  preceding  year 
an  examination  of  the  facts  upon  which  such  list  is  predicated. 
The  fact  that  the  name  of  any  particular  municipality  is 
omitted,  does  not  necessarily  mean  its  bonds  are  not  legal, 
but  may  mean  its  financial  officials  have  been  negligent  in 
supplying  requested  data.  A  list  of  "legals"  in  New  York, 
Massachusetts  and  Connecticut  follows  this  chapter. 

After  a  bond  has  been  purchased  by  a  bank,  and  for  some 
reason  the  situation  changes  so  that  the  bond  ceases  to  meet 
the  legal  requirements,  must  the  bank  sell  the  bond?  The 
Attorney  General  of  New  York  has  decided  that  a  savings 
bank  may  be  compelled  to  do  so  by  the  State  banking  super- 
intendent.^ 

It  Is  probably  true  that  the  ordinary  trustee  would  be 
accountable  to  his  beneficiaries  if  a  bond,  having  ceased  to  be 
a  legal  investment,  should  depreciate  In  price. 

Postal  savings  deposits. — Under  the  Postal  Savings  Law 
the  funds  received  at  postal  savings  depository  offices  of  each 
city,  town,  village  or  other  locality,  must  be  deposited  in  sol- 
vent banks  located  therein,  provided  these  banks  qualify  to 
receive  deposits.  One  of  the  qualifications  is  the  pledging  by 
the  banks  against  the  deposits,  of  such  securities  as  the  board 
prescribes.  The  Board  of  Trustees  by  its  regulations  of 
August  16,  1916  (as  amended)  has  prescribed  the  terms  and 
conditions  of  the  figures  at  which  different  classes  of  munici- 
pal bonds  will  be  accepted. 

Bonds  of  any  city  or  county  having  a  population  of  over 

"  Cons.  Laws,  Chap.  2,  Sec.  239. 

'Cons.  Laws,  Chap.  13,  Sec.  Ill;  Chap.  14,  Sec.  85;  Chap.  50,  Sec.  116. 

■"Opinions  of  Attorney  General,  1908,  p.  371, 


BONDS  AS  INVESTMENTS  111 

30,000  are  accepted  at  90  per  cent  of  their  market  value,  but 
if  such  market  value  is  above  par,  they  will  be  accepted  at  only 
90  per  cent  of  the  par  value;  bonds  of  any  city,  town,  borough 
or  village  of  the  United  States  having  a  population  of  be- 
tween 20,000  and  30,000  are  accepted  at  80  per  cent  of  their 
market  value,  provided  said  market  value  is  not  in  excess  of 
par;  while  bonds  of  any  other  city,  town,  county  or  other 
legally  constituted  municipality  or  district  of  the  United 
States,  otherwise  eligible,  are  accepted  at  75  per  cent  of  their 
market  value  but  not  to  exceed  75  per  cent  of  the  par  value. 
Bonds  of  school  districts  are  included  in  this  classification. 

The  regulations  further  provide  that  the  municipality  or 
district  must  have  been  in  existence  for  a  period  of  ten  years, 
must  not  have  defaulted  for  ten  years  and  must  not  have  a 
net  funded  indebtedness  exceeding  10  per  cent  of  the  valua- 
tion of  its  taxable  property.  The  regulations  have  further 
defined  "net  funded  indebtedness."  The  definition  is  inter- 
esting for  the  reason  that  the  bonds  of  any  civil  division, 
whose  territorial  limits  are  approximately  coterminus  with 
the  municipality  or  district,  must  be  included  in  computing 
gross  debt.  Sinking  funds,  bonds  or  obligations  payable  from 
current  revenues,  and  bonds  issued  to  provide  public  utilities, 
if  self-sustaining,  assessment  bonds  to  the  extent  that  these 
bonds  are  secured  by  uncollected  assessments,  and  bonds 
which  are  to  be  paid  from  funds  given  by  the  State,  may  be 
deducted  in  determining  the  net  debt.  To  be  eligible,  the 
bonds  must  be  general  obligations,  payable  without  limita- 
tion to  a  special  fund,  from  the  proceeds  of  taxes  levied  upon 
all  the  taxable,  real,  and  personal  property  within  the  ter- 
ritorial limits  of  the  issuing  municipality  or  district.  Revenue 
bonds,  temporary  bonds,  temporary  notes,  certificates  of  in- 
debtedness and  warrants  are  excluded.  Provision  is  made 
for  bonds  of  consolidated  or  merged  municipalities.^ 

^  State  and  City  Section  of  the  Commercial  and  Financial  Chronicle,  De- 
cember 25,  1920. 


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116 


BONDS  AS  INVESTMENTS  117 

REFERENCES 

Chamberlain,  Lawrence:  "The  Principles  of  Bond  Invest- 
ment."   Third  Edition,  1913,  Henry  Holt  &  Co. 

Hoffman  &  Wood :  "Taxation  of  Federal,  State  and  Munici- 
pal Bonds."    Privately  printed  in  1921. 

Also  see  a  very  valuable  "Digest  of  Opinions  of  Attorney 
General  of  New  York  State  Relative  to  Legality  of  Mu- 
nicipal Bonds  as  Investments  for  Savings  Banks  and 
Trustees."  Prepared  for  E.  H.  Rollins  &  Son,  by  Messrs. 
Hoffman  and  Wood,  1922. 


Chapter  XIII 
TAXATION  OF  BONDS 

Complexity  of  our  tax  assessments. — The  complexity  of 
our  tax  assessments  and  the  conflict  of  tax  influence  caused 
by  the  defaults,  laws  and  rates  of  the  several  States,  and 
their  political  subdivisions,  and  the  over-shadowing  influence 
of  the  present  system  of  Federal  taxation  made  necessary 
by  the  late  war,  prevent  an  exhaustive  treatment  of  the  sub- 
ject in  a  book  of  this  character.  Only  an  outline  of  general 
principles  can  be  given  here.  In  the  application  of  general 
principles,  simplicity  is  desirable.  For  this  reason,  we  shall 
consider  the  theoretical  effect  of  a  tax  upon  the  ordinary 
corporation  bond. 

Direct  personal  property  tax  versus  income  tax. — The 
two  generally  recognized  taxes  in  the  United  States  affecting 
such  a  bond  are  direct  personal  property  taxes  and  income 
taxes.  The  personal  property  tax  is  generally  imposed  upon 
the  principal  of  the  bond.  The  income  tax  is  imposed  upon 
the  interest  the  bond  bears.  To  realize  the  effect  of  a  per- 
sonal property  tax  upon  the  principal  of  the  bond,  take  the 
hypothetical  case  of  a  bond  owned  in  a  State  having  no  per- 
sonal property  tax  and  no  income  tax.  If  such  a  State  were 
to  pass  a  law  imposing  a  one  per  cent  tax  upon  the  principal 
of  a  $1,000  bond  bearing  five  per  cent  interest,  the  owner 
would  be  obliged  to  pay  $10  in  taxes  each  year.  This  would 
reduce  the  income  on  the  bond  from  $50  to  $40  a  year.  If 
the  State,  instead  of  enacting  the  personal  property  tax  just 
stated,  were  to  pass  an  income  tax  law  taxing  the  interest  of 
the  bond  at  the  rate  of  twenty  per  cent,  the  owner  would  be 
obliged  to  pay  $10  in  taxes  each  year.  This  would  make 
exactly  the  same  reduction  in  his  income  from  the  bond, 
which  would  then  yield  only  $40  a  year.  It  may  be  seen, 
therefore,  because  as  a  general  proposition  all  taxes  are  paid 
out  of  income,  that  it  is  immaterial,  in  considering  the  effect 
of  a  tax  on  the  bond,  whether  the  tax  is  based  upon  its  prin- 

118 


TAXATION  OF  BONDS  119 

cipal  or  income.  If  the  owner  of  the  bond  has  a  capital  of 
$100,000  consisting  entirely  of  similar  bonds,  the  effect  of 
the  tax  in  either  case  is  a  reduction  of  his  income  from  $5,000 
to  $4,000  a  year  so  long  as  he  holds  the  bonds  and  they  are 
subjected  to  such  taxes. ^ 

The  effect  of  the  taxation  of  the  income  from  bonds  is 
shown  in  the  table  entitled  "Tax  Free  v.  Taxable  Bonds," 
following  this  chapter.  It  will  be  observed  that  in  the  case 
of  an  individual  whose  income,  subject  to  surtaxes,  is  between 
$10,000  and  $12,000,  he  must  receive  4.44  per  cent  net  in- 
come, to  be  as  well  off  as  he  would  be  with  a  municipal  bond 
from  which  he  receives  a  non-taxable  income  of  4  per  cent 
per  annum.  As  the  amount  of  surtaxes  increases,  the  discrep- 
ancy is  more  marked.  The  fortunate  individual  whose  in- 
come exceeds  $200,000  a  year,  must  receive  9.53%  to  obtain 
as  much  income  as  he  would  obtain  from  a  4  per  cent  munici- 
pal bond. 

Definition  of  the  taxing  power.- — The  power  to  tax  is 
essentially  incident  to  sovereignty.  It  arises  out  of  necessity 
and  is  possessed  by  all  sovereign  States.  Necessarily,  it  is 
limited  to  subjects  within  the  jurisdiction  of  the  State.  Those 
subjects  are  persons,  property,  and  business.  Whatever  form 
taxation  may  assume,  it  must  relate  to  one  of  these  subjects. 

Taxing  power  of  the  United  States. — Power  "to  lay  and 
collect  taxes,  duties,  imposts  and  excises"  is  conferred  upon 
Congress  by  Art.  1,  Sec.  8  of  the  Constitution  of  the  United 
States.  That  this  power  is  exhaustive  and  embraces  every 
conceivable  power  of  taxation,  has  never  been  questioned,  but 
it  is  also  conceded  that  it  is  subject  to  the  limits,  expressed 
or  implied,  contained  in  other  sections  of  the  Federal  Con- 
stitution. 

Limitations  upon  the  Federal  taxing  power. — The  Con- 
stitution of  the  United  States  contains  three  express  limita- 
tions upon  the  power  of  taxation  conferred  upon  the  Federal 
Government.  All  duties,  imposts  and  excises  are  required  to 
operate  uniformly  throughout  the  United  States.  Taxes  or 
duties  on  articles  exported  from  any  State  are  prohibited,  and 
capitation   and  other  direct  taxes,   except  income   taxes,   are 

*  Annals,  p.  156. 

'Much  of  the  following  material  is  derived  from  "Taxation  of  Federal, 
State  and  Municipal  Bonds"  by  Messrs.  Hoffman  and  Wood,  to  which  the  stu- 
dent is  referred  for  a  more  complete  treatment  of  the  subject 


120  MUNICIPAL  BONDS 

also  prohibited,  unless  levied  in  proportion  to  the  census  or 
enumeration  directed  by  the  Constitution  to  be  taken.  Many 
limits  upon  this  power  are  also  implied  from  the  nature  of 
our  federal  form  of  government  and  from  other  express 
limits  imposed  upon  the  Federal  Government  by  the  Con- 
stitution. 

Taxing  power  of  the  States. — The  States  composing  the 
United  States  are  sovereign  States,  and  the  power  of  taxa- 
tion is,  therefore,  inherent  in  each  State. 

Unless  restrained  by  the  provisions  of  the  State  or  Fed- 
eral Constitution,  the  power  of  a  State  as  to  the  mode,  form 
and  extent  of  taxation  is  unlimited,  where  the  subjects  to 
which  it  applies  are  within  its  jurisdiction.  The  legislature 
levying  the  tax  is  the  sole  and  ultimate  judge  of  the  expedi- 
ency or  necessity  of  requiring  it  and  of  the  extent  to  which  it 
shall  be  charged  upon  any  class  of  taxable  subjects.  Hence, 
in  the  absence  of  constitutional  limitation,  the  legislature  may 
select  the  subjects  of  taxation  and  upon  those  subjects  only, 
may  the  taxing  officials  of  the  State  extend  the  tax.  Subjects 
not  selected  for  taxation  by  the  legislature  are  commonly 
designated  as  "exempt  from  taxation." 

Limitations  upon  the  taxing  power  of  the  States. — Many 
limitations  are  imposed  upon  the  taxing  power  of  the  States 
by  the  Constitution  of  the  United  States.  By  the  fourteenth 
amendment,  the  States  are  prohibited  from  depriving  citizens 
of  property  without  due  process  of  law,  and  this  amendment 
has  been  construed  as  prohibiting  the  levy  of  taxes  except  for 
public  purposes.  It  is  also  well  settled  that  a  State  cannot 
tax  bonds  of  the  United  States  or  its  Territories  without  the 
consent  of  the  Congress. 

Purposes  for  which  taxes  may  be  levied. — The  power  of 
taxation,  moreover,  can  be  exercised  only  for  public  purposes. 
In  the  leading  case  upon  this  subject,  Mr.  Justice  Miller  said, 
"To  lay  with  one  hand  the  power  of  the  government  on  the 
property  of  the  citizen,  and  with  the  other  bestow  it  upon 
favoured  individuals  to  aid  private  enterprise  and  build  up 
private  fortunes,  is  none  the  less  a  robbery  because  it  is  done 
under  the  forms  of  law  and  is  called  taxation.  This  is  not 
legislation.  It  is  a  decree  under  legislative  forms.  Nor  is  it 
taxation."  ^ 

'Loan  Association  'v.  Topeka  (1874),  20  Wall    (U.  S.)  655  at  664. 


TAXATION  OF  BONDS  121 

Taxation  of  the  principal  of  State  and  municipal  bonds  by 
the  United  States. — As  the  power  to  tax  is  the  power  to  de- 
stroy, to  admit  the  power  of  the  Federal  Government  to  tax 
the  States,  or  their  instrumentaHties  of  government,  would 
completely  subordinate  the  States  to  the  Federal  Government. 
It  is,  therefore,  well  established  that  it  is  not  within  the 
power  of  the  United  States  to  tax  a  State  or  its  governmental 
instrumentalities,  and,  as  to  tax  a  bond  issued  by  a  State  or 
one  of  its  subdivisions  is  to  tax  a  governmental  function,  it 
is  well  established  that  the  power  to  tax  such  obligations  is 
not  vested  in  the  United  States. 

Taxation  of  the  principal  of  State  and  municipal  bonds 
by  the  States. — While  a  State  may  exempt  State  or  munici- 
pal bonds  from  taxation,  unless  prohibited  by  its  constitution 
from  doing  so,  it  may  refuse  to  grant  such  an  exemption.  It 
is  well  settled  that,  in  the  absence  of  constitutional  limita- 
tions, the  power  of  taxation  extends  to  and  embraces  the 
bonds  of  the  State  and  its  municipalities. 

In  levying  a  tax  upon  such  bonds,  however,  the  State  may 
not  impair  the  obligation  of  the  contract  with  the  holders  of 
the  bonds  and  the  coupons  representing  the  interest  thereon. 

The  bonds  of  other  States  or  of  the  municipalities  of 
other  States  may  be  taxed  if  located  within  the  limits  of  the 
State  levying  the  tax,  or  owned  by  residents  of  that  State. 
Statutes  levying  such  taxes  do  not  violate  the  Federal  Con- 
stitution, as  the  several  States,  in  ratifying  that  instrument, 
did  not  enter  into  a  covenant  preventing  one  State  from  tax- 
ing the  public  securities  issued  by  another  State,  her  counties, 
or  municipalities.  The  State  may  also  authorize  its  political 
subdivisions  to  tax  pubhc  securities,  including  the  bonds  of  the 
subdivision  levying  the  tax,  but  only  when  the  security  itself 
or  its  owner  is  within  the  jurisdiction  of  the  State. 

Taxation  of  the  income  from  State  and  municipal  bonds : 
nature  of  the  tax. — The  Federal  Government  and  many  of 
the  States  have  enacted  statutes  taxing  income.  While  many 
of  these  statutes  were  passed  pursuant  to  express  constitu- 
tional provisions  authorizing  the  enactment  of  such  laws,  the 
power  of  the  legislature  to  tax  incomes  does  not  depend  upon 
a  constitutional  grant.  The  power  of  taxation  is  plenary 
and  includes  all  methods  of  taxation. 

Such  taxes  are  not  property  taxes  within  the  meaning  of 
constitutional  provisions  requiring  taxation  of  property  to  be 


122  MUNICIPAL  BONDS 

equal  and  uniform,  and  accordingly,  graduated  taxes  have 
been  uniformly  sustained  as  constitutional.  Nor  are  such 
taxes  to  be  considered  as  direct  personal  taxes  or  privilege 
taxes. 

Non-residents,  therefore,  may  be  subjected  to  such  taxa- 
tion based  upon  the  income  earned  in  the  State  or  received 
from  residents  of  the  State  without  violating  the  Federal 
Constitution,  and  a  State  may  tax  income  derived  from  bonds 
owned  by  a  non-resident,  if  the  bonds  are  located  in  the  State, 
but  not  otherwise.  Not  being  personal  taxes,  the  State  levy- 
ing the  tax  need  not  have  jurisdiction  over  the  person  entitled 
to  the  income  taxed.  The  fact  that  the  property  from  which 
the  income  is  derived  Is  also  taxed,  does  not  render  a  tax  upon 
such  income  void  for  double  taxation,  the  Income  being  re- 
garded as  a  distinct  subject  of  taxation.  In  most  States  there 
Is  no  legal  obstacle  to  double  taxation. 

Taxation  of  income  of  State  and  municipal  bonds  by  the 
United  States. — As  the  Constitution  read  prior  to  the  adoption 
of  the  sixteenth  amendment,  the  Federal  Government  had  no 
power  to  levy  income  taxes  unless  apportioned  between  the 
States.  This  was  decided  in  the  Pollock  case.^  Thereafter 
the  sixteenth  amendment  to  the  Constitution  was  adopted  and 
became  effective  February  25,  1913.  This  provides  as  fol- 
lows :  "The  Congress  shall  have  power  to  lay  and  collect 
taxes  on  incomes  from  whatever  source  derived,  without 
apportionment  among  the  several  States,  and  without  regard 
to  any  census  or  enumeration." 

Effect  of  the  sixteenth  amendment  to  the  Federal  Consti- 
tution.— Since  the  adoption  of  this  amendment,  the  question  has 
arisen  whether  the  taxing  power  of  the  United  States  has 
been  extended,  through  its  adoption,  so  as  to  permit  of  the 
taxation  by  the  Congress  of  the  income  derived  from  bonds 
of  the  various  States,  and  of  the  subdivisions  thereof.  Some 
diversity  of  opinion  appears  to  exist  among  eminent  authori- 
ties, and  so  far  the  question  has  not  been  directly  passed  upon 
by  the  United  States  Supreme  Court.  It  Is  the  general  opin- 
ion that  no  additional  powers  of  taxation  have  been  devolved 
upon  the  Congress  by  virtue  of  the  sixteenth  amendment,  or 
to  state  It  differently,  that  property  or  the  income  from 
property  which  could  not  be  taxed  prior  to  the  adoption  of 
the  sixteenth  amendment,  cannot  now  be  taxed  unless  the  tax 

*  Pollock  V.  The  Farmers'  Loan  and  Trust  Co.  (1895),  157  U.  S.  429. 


TAXATION  OF  BONDS  123 

is  apportioned  between  the  States.  The  writer,  however, 
strongly  dissents  from  this  view.  The  words  "from  what- 
ever source  derived"  must  be  construed  in  accordance  with 
the  ordinary  rules  of  statutory  construction;  they  must  be 
given  effect  irrespective  of  the  thoughts  in  the  minds  of  the 
originators  of  the  phrase,  or  in  the  minds  of  the  advocates 
or  opponents  of  the  amendment.  If  the  words  are  to  be 
given  their  ordinary  meaning  in  the  English  language,  it 
would  seem  there  can  be  no  doubt  that  additional  power  to 
tax  has  been  granted  to  the  Congress.  It  is  contended,  there- 
fore, that  although  the  Congress  has  not  as  yet  attempted 
to  tax  the  interest  on  municipal  bonds,  it  has  the  power  to 
levy  such  a  tax  under  the  provisions  of  the  sixteenth  consti- 
tutional amendment. 

Taxation  of  income  of  State  and  municipal  bonds  by  the 
States. — Income  from  State  and  municipal  bonds  is  taxable 
by  the  State  of  issue  when  such  bonds  are  owned  by  its  citizens. 
Can  the  State,  however,  levy  such  a  tax  upon  the  income  de- 
rived from  a  bond  which  it  has  contracted  to  exempt  from 
taxation?  The  right  of  the  State  to  tax  the  income  of  such 
bonds  does  not  appear  ever  to  have  been  decided.  On  prin- 
ciple, however,  it  would  seem  that  it  is  not  within  the  power 
of  a  State  to  tax  such  income.  It  is  well  established  that  a 
tax  upon  the  income  of  a  bond  is  a  tax  upon  the  security.  It 
is  for  this  reason  that  a  State  cannot  tax  the  interest  of  bonds 
of  the  Federal  Government.  It  would  seem  to  be  no  less  a 
tax  upon  the  security  when  it  is  levied  by  a  State  upon  the 
income  of  a  State  or  municipal  bond.  If  the  bond  is  exempt 
from  taxation  by  a  contract,  protected  by  the  Federal  Con- 
stitution, in  what  respect  does  the  taxation  of  the  income 
derived  from  such  a  bond  differ  from  the  taxation  of  the 
income  of  bonds  of  the  United  States? 

When  a  bond  is  issued  under  such  circumstances  that  a 
contract  for  an  exemption  from  taxation  arises,  or  when  for 
a  valuable  consideration  the  State  has  contracted  to  exempt 
a  bond  from  future  taxation,  the  State  may  not  violate  such 
contract  by  taxing  the  bond  under  the  guise  of  taxing  the 
income  derived  therefrom. 

When,  however,  the  exemption  from  taxation  is  not  a 
contract  right,  it  may  be  withdrawn  at  any  time  by  the  State. 
Under  such  circumstances,  there  seems  to  be  no  reason  why 
the  State  may  not  tax  the  income  of  the  bond.     If  it  might 


124  MUNICIPAL  BONDS 

withdraw  entirely  the  exemption,  it  clearly  can  withdraw  it 
to  the  extent  of  subjecting  to  taxation  the  income  derived 
from  the  bond. 

Taxation  of  bonds  of  non-residents. — As  to  the  taxation 
of  public  securities  belonging  to  non-residents,  it  is  well  settled 
that  such  securities  are  in  such  concrete,  tangible  form  that 
they  are  subject  to  taxation  where  found  irrespective  of  the 
domicile  of  the  owner  and  a  State  may  declare  that,  if  found 
within  its  limits,  they  shall  be  subject  to  taxation.  The 
statutes  of  most  States  accordingly  provide  for  the  taxation 
of  such  securities  in  the  hands  of  non-residents  either  ex- 
pressly or  by  providing  that  all  personal  property  within  the 
State  shall  be  subject  to  taxation. 

Situs  for  taxation. — The  physical  presence  of  the  bond 
within  the  limits  of  the  State  is  essential  to  give  the  State 
jurisdiction  to  tax  it,  when  owned  by  a  non-resident.  The 
power  of  taxation  is  confined  to  the  territorial  limits  of  the 
State  and  it  is  not  within  the  power  of  a  State  to  tax  bonds 
owned  by  a  non-resident  unless  it  has  acquired  jurisdiction 
over  the  bonds  by  reason  of  their  presence  in  the  State.  An 
attempt  to  tax  property  not  within  the  jurisdiction  of  the 
State  violates  the  Constitution  of  the  United  States  by  de- 
priving the  owner  thereof  of  property  without  due  process 
of  law. 

Mere  temporai-y  presence  of  property  within  the  limits 
of  the  State  is  not  sufficient  to  confer  jurisdiction.  There- 
fore, a  bond  sent  into  a  State  for  collection,  registration,  sale 
or  exchange,  etc.,  by  a  non-resident,  is  not  subject  to  taxation 
by  that  State. 

Inheritance  taxes. — An  inheritance,  succession,  or  dece- 
dent's estate  tax,  so  called,  is  a  tax  on  the  succession  and  not 
on  the  property  itself.  The  right  to  take  property  by  devise 
or  descent  is  the  creature  of  the  law  and  the  authority  which 
confers  the  right  may  impose  conditions  upon  it. 

The  States  and  the  United  States  may  tax  the  privilege, 
discriminate  between  relatives  and  between  these  and  stran- 
gers, and  grant  exemptions.  As  the  tax  is  not  levied  upon 
the  property  which  passes  to  the  heir  or  devisee,  but  upon  the 
right  to  take  the  property  by  will  or  descent,  the  character  of 
the  property  passing  is  immaterial.  Hence,  limitations  upon 
the  right  of  the  Federal  Government  to  tax  the  instrumen- 
talities of  the  States,  or  vice  versa,  do  not  apply  to  inheri- 


TAXATION  OF  BONDS  125 

tance  taxes.  The  State  or  Federal  Government  may  lawfully 
measure  the  amount  of  tax  by  referring  to  the  value  of  the 
property  passing.  The  incidental  fact  that  such  property  is 
composed,  in  whole  or  in  part,  of  Federal  or  municipal  bonds 
does  not  affect  the  validity  of  the  tax. 

In  considering  taxation  and  its  effect,  it  must  be  remem- 
bered that  the  purpose  of  taxation  is  to  raise  money  for  the 
necessities  of  government,  whether  national,  federal  or 
municipal.  Taxing  acts  are  not  always  fair  or  equitable,  and 
they  are  not  necessarily  intended  to  be.  Government  cannot 
exist  without  the  means  to  carry  it  on,  and  the  following 
quotation  from  Bernard  Shaw's  Ccesar  and  Cleopatra,  illus- 
trates the  point: 

Rufio  (bluntly).  You  must  pay,  Pothinus.  Why  words?  You  are  get- 
ting off  cheaply   enough. 

Pothinus  (bitterly).  Is  it  possible  that  Cassar,  the  conqueror  of  the  world, 
has  time  to  occupy  himself  with  such  a  trifle  as  our  taxes? 

Casar.  My  friend:  taxes  are  the  chief  business  of  a  conqueror  of  the 
world. 


126  MUNICIPAL  BONDS 

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TAXATION  OF  BONDS 


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Chapter  XIV 
VALUATION  OF  BONDS 

There  is  no  golden  rule  for  the  valuation  or  appraisal  of 
bonds,  whether  municipal  or  other.  The  much  overworked 
word  "relativity"  may  be  used  In  describing  the  mental  and 
mathematical  processes  Involved  In  determining  purchasing 
and  selling  price,  but  the  word  should  be  "paid  extra."  As 
Humpty  Dumpty  says  to  Alice  In  "Through  the  Looking- 
Glass" :  "When  I  make  a  word  do  a  lot  of  work  like  that,  I 
always  pay  It  extra." 

Money  a  commodity. — Money  is  a  commodity,  and  its 
price,  or  the  price  of  Its  use,  fluctuates  in  tides  and  is,  except 
when  prices  are  "pegged"  during  a  national  emergency, 
governed  by  the  laws  of  supply  and  demand.  The  buyer  of 
a  bond  holds  a  written  promise  to  pay  a  specified  sum  of 
money  to  the  owner  of  the  bond  on  a  specified  date.  The 
maker  of  the  bond,  whether  individual  or  corporate,  promises 
to  pay  Interest  for  the  use  of  the  money.  In  ordinary  terms, 
the  bondholder  makes  a  loan  and  Is  paid  for  making  It.  How 
much  he  Is  paid  Is  governed  by  many  factors,  summed  up 
in  the  words  "market  conditions"  existing  at  the  time  the 
loan  Is  made. 

Interest. — Interest  is  the  amount  paid,  at  annual,  semi-an- 
nual, or  quarterly  periods  for  the  use  of  money.  It  Is  meas- 
ured by  a  percentage  of  the  sum  borrowed  and  In  modern 
times  such  percentage  has  been  from  two  to  eight  per  cent 
or  more.  Gorgeous  rates  of  Interest,  such  as  ten  per  cent  a 
month  or  one  hundred  and  twenty  per  cent  a  year,  have  passed 
with  the  happy  frontier  days  of  the  Golden  West  when  prop- 
erty was  as  insecure  as  life. 

Nominal  yield. — Disregarding  theories  of  present  value, 
and  compounding  Interest  return,  the  sum  of  money  actually 
paid  for  the  use  of  $1,000  at  five  per  cent  for  twenty  years 
is  $1,000,  which  is  the  nominal  yield,  and  the  net  yield,  if  the 
bond  is  purchased  at  par. 

128 


VALUATION  OF  BONDS  129 

Net  yield. — Bonds  are  rarely  purchased  or  sold  at  par,  but 
"at  a  premium"  which  is  above  par,  or  "at  a  discount"  which 
is  below  par.  Now  it  is  evident  that  a  bond  purchased  at  a 
discount  gradually  appreciates  in  value  as  it  approaches  ma- 
turity, and  a  bond  purchased  at  a  premium  depreciates  for 
the  same  reason.  The  amount  received  as  interest  is  not  the 
true  income  if  the  principal  either  appreciates  or  depreciates. 
In  such  cases,  the  real  income  is  determined  by  the  actual 
income,  reduced  by  the  amount  of  depreciation  of  principal, 
or  increased  by  the  amount  of  appreciation.  For  a  further 
discussion  of  both  depreciation  and  appreciation,  the  reader 
will  do  well  to  consult  "Jordan  on  Investments."  ^ 

Tables  of  bond  values. — These  are  used  to  determine  net 
yield,  when  price,  face  value,  and  date  of  maturity  are  known, 
and  to  ascertain  the  price  at  which  a  bond  of  known  face 
value  and  maturity  must  be  purchased  to  yield  a  certain 
desired  return.  The  mathematical  and  accounting  theories 
upon  which  the  soundness  of  such  tables  depends  are  highly 
interesting,  but  neither  a  statement  nor  a  discussion  of  such 
theories  has  any  place  here.  The  student  is  referred  to 
Jordan, 2  Rollins,^  Chamberlain,^  and  other  writers.  The 
point  for  the  reader  to  observe  is  that  by  the  use  of  such 
tables,  we  can  determine  the  basis  or  net  yield  upon  which 
bonds  sell,  and  the  basis,  so  determined,  measures  the  value 
of  the  investment.  If  the  basis  or  net  yield  is  5.40,  the 
investor  has  a  cheaper  bond  than  he  has  if  the  basis  is  3.10. 
The  expression  "net  income  basis"  is  frequently  used  for  and 
is  more  accurate  than  either  "basis"  or  "net  yield." 

Fluctuations  in  the  net  income  basis  are  shown  in  the 
chart  following  this  chapter.  By  reference  to  it,  the  rise  and 
fall  of  prices  since  1900  may  be  studied,  and  it  will  be  ob- 
served that  bonds  were  highest  in  1901,  the  basis  being  3.10 
and  lowest  in  September,  1920,  the  basis  being  5.25.  The 
sudden  and  unexpected  rise  is  noteworthy,  beginning  in  July, 
1921,  and  temporarily  suspended  in  December,  1921. 

The  prices  obtained  twenty  years  ago  by  an  investment 
banking  house  are  shown  in  the  copy  of  an  advertisement  of 
Messrs.   Harris  Forbes  &  Company,  taken  from  the  New 

*  Jordan,  p.  276. 
"p.  274. 

*  Annals,  p.  12. 
*pp.  405  and  426. 


130  MUNICIPAL  BONDS 

York  Sun  of  November  1,  1921,  following  this  chapter.  The 
"net  returns"  may  be  compared  with  the  "yield  per  cent"  of 
various  issues  during  the  weeks  ending  December  16  and 
December  30,  1921,  shown  in  the  tables  taken  from  the  New 
York  Times  of  December  17  and  December  31,  1921, 

The  income  basis  on  which  New  York  City  bonds  have 
sold  from  1907  to  1921  is  shown  in  the  schedule  "Results 
of  New  York  City  Bond  Sales"  abbreviated  from  a  table  pub- 
lished in  the  Bofid  Buyer  on  December  16,  1921,  following 
this  chapter. 

Differences  in  yield  between  different  maturities  of  the 
same  issue  of  bonds,  sold  at  a  discount,  at  par  and  at  a  pre- 
mium, are  shown  in  the  advertisement  of  $31,800,000  State 
of  New  York  5s,  offered  June  10,  1921,  a  copy  of  which 
follows  this  chapter.  The  earlier  maturities  offered  at  a  dis- 
count yield  more  than  the  coupon  rate  of  interest.  The  bonds 
maturing  in  the  year  1931  and  thereafter,  offered  at  increas- 
ing premiums  as  the  term  lengthens,  yield  less  than  the  coupon 
rate  of  interest  or  slightly  more  than  4.70. 

Purchasing  power  of  the  dollar. — It  must  not  be  over- 
looked that  the  purchasing  power  of  money  varies  from  time 
to  time,  and  tends  to  increase  or  to  decrease  over  long 
periods.  The  rise  in  the  cost  of  living  during  the  World  War 
and  thereafter  is  fresh  in  our  recollection.  The  gradual,  too 
gradual,  decline  is  hailed  with  delight.  If  it  cost  $5,000  a 
year  to  live  in  1910  and  costs  $10,000  a  year  in  the  year  of 
Grace  1922,  the  yield  of  interest  at  six  per  cent  purchases 
only  what  the  yield  at  three  per  cent  would  buy  a  decade  ago. 
A  chart  showing  wholesale  prices  in  the  United  States  for 
110  years,  reproduced  with  the  permission  of  Col.  Leonard 
P.  Ayers  (Vice  president  of  The  Cleveland  Trust  Company), 
from  "Price  Changes  and  Business  Prospects"  follows  this 
chapter.  The  price  chart  shows  mountainous  peaks  during 
and  after  the  War  of  1812,  the  Civil  War  and  the  World 
War.  In  each  case,  prices  rose  to  far  more  than  twice  the 
normal.  After  the  first  two  wars,  prices  declined  precipi- 
tously for  about  five  years  and  then  more  slowly  for  25  or  30 
years.  We  may  reasonably  infer  that  prices  will  continue  to 
decline  for  several  years. 

Market  conditions. — Market  conditons  are  a  resultant  of 
causes  and  events,  some  extending  over  a  period  of  years, 
such  as  gradually  rising  commodity  prices,  and  some  immedi- 


VALUATION  OF  BONDS  131 

ate,  such  as  panics.  The  general  industrial  condition  of  the 
country  (calling  or  not  calling  for  new  money)  depends  upon 
numerous  important  factors.  In  substance,  it  is  the  demand 
for  money  which  determines  its  price  and  this  price  is 
interest. 

The  value  of  a  bond  has  been  said  to  be  the  capitalized 
value,  at  the  current  interest  rate  paid  for  short-time  money, 
of  the  amount  of  its  yield.  If  the  current  interest  rate  rises 
very  sharply,  and  the  high  rate  is  believed  to  be  only  tem- 
porary, the  price  of  bonds  will  not  be  materially  affected. 
Stated  differently,  it  is  said  that  the  price  of  bonds  varies 
inversely  with  the  rate  of  interest  paid  for  short-time  money. ^ 

Bonds  are  not  equally  valuable. — In  the  preceding  chap- 
ter, the  elements  of  a  sound  investment  were  discussed,  and 
in  other  chapters  differences  were  shown  between  the  powers 
of  municipalities  or  quasi-municipalities  and  between  unquali- 
fied and  qualified  promises  to  pay.  There  must  be  a  difference 
in  value  between  a  $1,000  water  bond  of  New  York  City  and 
the  bond  of  an  irrigation  or  drainage  district,  although  they 
bear  the  same  interest  rate  and  have  the  same  term.  One  is 
the  unqualified  promise  of  the  country's  largest  city  to  pay  at 
all  events.  The  other  is  the  promise  to  pay  if  the  project  is 
successful  and  taxes  (or  assessments)  are  collected.  The 
first  bond  may  sell  for  105.75.     The  second  may  sell  for  80. 

Differences  in  value  then  exist  between  the  bonds  of  one 
city  and  another,  as  well  as  between  the  bonds  of  a  city  and, 
for  example,  a  school  district.  The  purpose  of  issue  may 
affect  value  very  materially.  In  Chapter  XVI,  devoted  to 
particular  bonds,  will  be  found  statements  of  the  peculiarities 
of  bonds  of  different  issuing  subdivisions  and  of  bonds  issued 
for  various  purposes. 

Differences  in  value  as  between  municipalities. — ^As  be- 
tween municipalities,  several  factors  must  be  taken  into  con- 
sideration; or,  if  the  value  of  the  bonds  of  A  is  to  be  esti- 
mated, by  a  consideration  of  the  value  of  similar  bonds  of  B. 
These  factors  are : 

1.  Assessed  valuations  of  taxable  real  property. 

2.  Indebtedness. 

3.  Tax  rates. 

4.  Population  and 

5.  Credit. 

'  Annals,  p.  202. 


132  MUNICIPAL  BONDS 

The  factors  being  equal,  the  bonds  of  A,  having  an  as- 
sessed valuation  of  ten  million  dollars,  are  better  than  the 
bonds  of  B  which  have  an  assessed  valuation  of  five  million 
dollars.  Or  again,  other  factors  being  equal,  the  bonds  of  A 
with  a  debt  of  five  hundred  thousand  dollars  are  better  than 
the  bonds  of  B  with  a  debt  of  seven  hundred  and  fifty  thou- 
sand dollars.  If  the  tax  rate  of  A  is  greater  than  that  of  B, 
the  burden  on  the  landowner  is  greater  and  the  nearer  is  land 
in  A  to  the  tax  saturation  point.  The  ability  of  land  to  bear 
taxation  is  smaller  than  might  be  supposed  by  any  but  the 
well-informed.  The  larger  population  of  B  indicates  growth, 
industry,  and  power  to  pay.  And  A,  having  an  unbroken 
record  of  paying  its  debts,  is  in  much  better  position  to  bor- 
row (and  its  bonds  will  be  more  eagerly  sought  for)  than  B 
which  has  defaulted  at  some  time  in  the  past. 

Assessed  valuation. — "Assessed  valuation,  or  assessment, 
an  item  always  on  the  bond  circular  *  *  *  is  not  hard  to 
understand.  It  is  the  value  put  on  property  by  assessors  as 
the  basis  for  taxation.  The  'grand  list'  of  certain  States, 
e.g.  Connecticut,  is  a  synonym.  *  *  *  The  'tax  duplicate'  is 
another  synonym."  ^  So  is  the  "abstract  of  ratables"  in  New 
Jersey.  "Assessed  valuation  is  of  importance  chiefly  in  its 
relation  to  the  tax  rate  and  to  real  valuation.  Real  valuation, 
in  its  turn,  is  liable  to  different  interpretations  from  different 
assessors"  '^  in  different  States  and  in  different  places  in  the 
same  State. 

In  any  comparison  of  assessed  valuations,  only  real  estate 
valuations  should  be  considered  and  the  ratio  of  real  value  to 
assessed  value  must  be  determined.  In  a  certain  New  York 
town  some  years  ago,  the  assessed  valuations  were  twenty-five 
per  cent  of  the  real,  despite  the  statute  requiring  assessment 
at  the  real  value.  Thus  the  town  escaped  paying  its  fair  share 
of  the  State  and  county  tax,  efforts  of  the  board  of  equaliza- 
tion to  the  contrary  notwithstanding.  As  the  borrowing 
power  of  this  town  was  and  is  ten  per  cent  of  the  assessed 
valuation,  its  ostensible  borrowing  power  was  only  one-quar- 
ter of  its  real  limit  based  on  an  honest  assessment  and  the  tax 
rate  was  of  course  very  high. 

Comparison  of  assessed  valuations  of  the  same  city  for 
a  period  of  years  is  sometimes  of  value,  but  care  must  be 

"Chamberlain,  p,   191. 
'Id.,  p.  192. 


VALUATION  OF  BONDS  133 

exercised  to  make  necessary  allowance  for  changes  in  the 
basis  of  assessment.  For  example,  the  taxable  values  may 
have  been  sixty  per  cent  in  past  years  and  the  ratio  of  real  to 
assessed  values  increased  or  decreased. 

Indebtedness. — The  indebtedness  of  a  municipality  is 
either  gross  or  net.  In  considering  indebtedness,  it  is  well  to 
state  separately  the  bonded  debt,  floating  debt,  contract  debt, 
and  the  water  debt.  This  segregation  is  important  because  a 
"set  up"  in  one  way  may  not  answer  all  questions. 

Whether  a  bond  is  a  legal  investment  for  fiduciaries  in 
New  York  State  is  determined  somewhat  differently  from 
whether  it  is  available  to  secure  postal  savings  deposits.  The 
requirements  which  bonds  must  possess  to  be  available  for 
investment  by  trustees  and  other  fiduciaries,  and  to  satisfy  the 
regulations  of  the  postal  savings  department,  are  referred  to  in 
Chapter  XII.  For  example,  a  bond  to  be  a  legal  investment 
for  a  trustee  in  New  York  must  be  that  of  a  municipality  of 
which  the  net  debt  does  not  exceed  seven  per  cent  of  the  tax- 
able property,  but  to  be  acceptable  for  postal  savings  depos- 
its, the  municipality  may  have  a  net  debt  of  ten  per  cent. 

Net  debt  may  mean  bonded  and  floating  debt,  less  sinking 
funds,  cash  on  hand  for  redemption  of  bonds  falling  due  in 
the  current  year,  and,  for  certain  purposes,  less  water  debt 
or  debt  incurred  for  public  utilities  which  in  contemplation  of 
law  are  self-sustaining.  The  economic  net  debt  is  the  indebt- 
edness to  pay  for  which  a  tax  must  be  levied.  For  illustra- 
tion of  debt  statements,  see  Chapter  VI,  and  the  forms 
therein  referred  to.  Comparison  of  indebtedness  should  ob- 
viously be  made  only  when  the  indebtedness  is  set  up  in  the 
same  way. 

Tax  rates. — Tax  rates  are  very  difficult  to  compare.  If 
A  assesses  the  taxable  property  at  SOfo  of  its  true  valuation, 
and  raises  the  same  amount  of  money  as  B  which  assesses  real 
property  of  the  same  true  value  at  its  true  value,  the  tax  rate 
of  A  will  be  twice  that  of  B.  Yet  the  bonds  of  A  may  be 
quite  as  good  as  those  of  B.  For  purposes  of  comparison,  the 
assessed  valuations  of  both  municipalities  must  be  equalized, 
and  it  is  "desirable  to  separate  the  city  tax  from  the  county 
and  States  taxes."  ^  And  "there  will  often  be  distinct  and 
special  assessment  taxes  of  one  sort  or  another  *  *  *  not 
included  even  in  the  'total  tax,'  but  which  are  imposed,  never- 

'  Chamberlain,  p.  182. 


134  MUNICIPAL  BONDS 

theless,  upon  such  a  large  portion  of  the  property  within  the 
corporate  limits  that  they  cannot  legitimately  be  over- 
looked." ^  A  large  western  city  which  has  a  low  tax  rate 
assesses  the  cost  of  sewers,  parks,  alleys,  and  sometimes 
streets,  upon  property  claimed  to  be  specially  benefited.  The 
assessment  areas  have  been  known  to  take  in  practically  the 
entire  taxable  property  of  the  city.  Inquiry  should  be  made 
whether  the  municipality  Is  at  the  same  time  a  school  or  other 
tax  district,  and  If  so  whether  the  school  or  other  tax  is 
included  in  the  total  rate  given  by  officials. 

The  saturation  point  of  taxation  is  relatively  low.  Three 
per  cent  on  improved  property  assessed  at  its  true  value 
becomes  noticeable;  three  and  one-half  per  cent  may  be  a 
burden;  and  a  higher  rate  may  absorb  the  owner's  income 
from  the  property.  Vacant  property  may  be,  and  very  fre- 
quently is,  abandoned  by  the  owner  after  the  accumulation  of 
a  few  years'  taxes  renders  it  costly  to  redeem.  A  second- 
class  city  In  New  York  had  over  five  million  dollars  unpaid 
taxes  on  its  books  within  the  past  three  years.  Hence  a  high 
tax  rate  may  be  an  indication  of  insecurity. 

Population. — Population  as  a  factor  in  valuation  has  little 
importance,  beyond  a  certain  point.  A  village  having  two 
hundred  people  will  have  a  low  assessed  valuation  and  little 
debt;  a  city  having  half  a  million  inhabitants  will  have  sub- 
stantial assessable  values  and  sufficient  excuse  for  existence 
for  it  to  borrow  money  to  pay  for  Improvements.  Growth 
of  population  is  an  Indication  of  Industrial  and  commercial 
growth  which  might  not  otherwise  be  revealed.  Population 
may  also  suggest  poll  or  capitation  taxes.  The  more  people, 
the  larger  the  return  from  such  taxes  will  be,  but  a  poll  tax 
is  too  uncertain  and  too  small  in  amount  to  be  a  factor  of 
security.  Population  must  be  known  before  availability  for 
postal  savings  deposits  can  be  determined. 

Credit  is  the  single  most  important  factor. — A  recent  de- 
fault, even  carelessness  In  meeting  interest  payments,  Is  a 
most  serious  matter  from  the  dealers'  or  investors'  stand- 
point. A  great  deal  can  be  said  about  the  meaning  of  munici- 
pal credit,  and  the  fiscal  history  of  counties  and  even  States 
which  have  defaulted,  but  It  can  all  be  summed  up  by  saying 
that  a  city's  credit  Is  shown  by  its  financial  history.  Much 
water  must  run  under  the  bridge  before  the  consequences  of 

•Chamberlain,  p.  182. 


VALUATION  OF  BONDS  135 

a  default  will  cease  to  be  reflected  In  the  value  of  a  city's 
bonds. 

In  practice,  the  valuation  of  bonds  is  described  as  follows 
by  a  buyer  for  a  reliable  and  conservative  investment  house: 


A  Study  of  the  Comparative  Market  Value  of  State  and 
Municipal  Bonds 

State  and  municipal  bonds  may  be   divided   into  two  classes: 

1.  Those  that  are  direct  obligations  secured  both  by  the  full  faith  and  credit 
of  the  State  or  political  subdivisions,  and  in  the  case  of  the  latter,  supported 
by  unlimited   ad  valorem  taxes. 

2.  Those  that  are  limited  obligations  of  the  State  or  political  subdivision 
supported  by  special  revenues  or  special  taxes  levied  on  properties  bene- 
fited. 

The  question  of  rating,  or  the  comparative  market  value  of  bonds  in  either 
of  these  classes,  may  best  be  studied  by  listing  the  various  requirements  gen- 
erally sought  for  by  investors. 

Class  I 

A.  Financial  statement  and  population. 

1.  Net  debt  within  5  per  cent  of  assessed  valuation  is  very  conservative  and 
with  population  of  30,000  or  more,  bonds  have  a  very  wide  market. 

2.  Net  debt  within  7  per  cent  of  assessed  valuation  is  conservative,  and 
with  population  of  100,000  or  more,  bonds  have  a  wide  market. 

3.  Net  debt  over  7  per  cent  of  assessed  valuation  passes  the  dividing  line 
between  first-grade  and  second-grade  bonds.  This  is  not  a  hard  and 
fast  rule,  as  there  are  many  cities  with  over  7  per  cent  net  debt  whose 
bonds  are  unquestionably  sound,  but  the  market  for  their  bonds  is  not 
as  general. 

Bonds  under  subdivisions  1  and  2,  when  meeting  all  other  requirements,  are 
legal  investment  for  savings  bank  and  trust  funds  in  New  York  and  New 
England.     With  few  exceptions,  bonds  in  Class  3  are  not  legal. 

4.  Character  of  population  of  small  communities,  such  as  villages,  towns, 
school  districts  and  sparsely  settled  counties,  is  of  the  utmost  importance 
and  must  always  be  considered. 

B.  Denomination — Coupon — Registration. 

1.  Denominations  of  $1,000  have  the  best  market;  $500  bonds  are  accept- 
able;  smaller  denominations   are   not  desirable. 

2.  Coupon  bonds  which  may  be  registered  as  to  principal  or  registered  as 
to  both  principal  and  interest  are  preferable.  If  interchangeable  from 
fully  registered  to  coupon,  so  much  more  desirable;  however,  but  few 
cities  provide  for  this. 

3.  Fully  registered  bonds  have  only  a  limited  market. 


136  MUNICIPAL  BONDS 

C.  Place  of  Payment  of  Principal  and  Interest. 

If  market  for  bonds  is  sought  in  the  East,  payment  of  principal  and 
interest  should  be  in  New  York.  Local  payment  of  principal  and  inter- 
est detracts  from  the  market  value,  and  since  the  demand  for  bonds  pay- 
able in  gold  is  very  limited,  where  this  is  provided,  it  does  not  add 
materially  to  the  value  of  the  bond. 

D.  Purpose  of  Issue  and  Maturity. 

Briefly,  it  is  desirable  that  the  life  of  the  bond  be  within  the  life  of  the 
improvement.  Bonds  issued  for  improvement  of  a  permanent  character 
are  preferred.  The  economic  soundness  of  the  purpose  of  the  issue  is 
given  careful  consideration   by   thoughtful   investors. 

E.  Local  Tax  Exemption. 

In  certain  States  all  current  issues  of  bonds  are  exempt  from  State  and 
local  taxation.  Where  bonds  are  exempt  from  State  and  local  taxation, 
they  generally  sell  at  a  lower  return  (or  higher  price)  than  taxable 
bonds.  It  is  accordingly  necessary  to  know  to  what  extent  bonds  are 
exempt  from  such  taxation. 

F.  Legal  Features. 

1.  Marketable   legal   opinion. 

2.  Limited  or  unlimited  taxes. 

3.  Voted  or  unvoted  bonds.      (A  "voted"  bond  evidences  popular  assent. — 
Author.) 

4.  Debt  limit. 

5.  Provisions  for   retiring  bonds   at  maturity. 

G.  Premiums  and  Discounts. 

Premium  bonds  are  not  generally  desired  by  individual  investors  but 
most  of  our  large  institutions  and  estates  now  amortize  premiums. 
The  market  for  a  bond  with  a  high  premium  is  not  quite  as  good  as 
the  market  for  a  discount  bond. 

H.  Summary  and  Conclusion. 

If  we  find  a  new  issue  of  bonds  has  all  the  features  desired,  we 
ascertain  in  what  States  it  is  a  legal  investment  for  trust  funds  and 
savings  banks.  From  this  we  estimate  the  extent  of  the  market  for 
possible  demand  for  the  bonds. 

The  next  question  is  whether  the  bonds  will  have  to  be  marketed 
at  a  premium,  and  if  so,  to  what  extent  this  premium  will  adversely 
afiFect  the  sale. 

Finally,  the  maturity  of  the  issue  is  considered.  If  the  bonds 
mature  all  at  one  time,  the  conclusion  as  'to  what  is  the  market  value 
is  promptly  arrived  at,  but  where  the  issue  matures  serially,  each 
maturity  must  be  considered   separately. 

The  question  of  market  value  is  decided  by  the  old  law  of  supply 
and  demand  and  money  market  conditions.  It  is  possible  to  put  in  writ- 
ing only  comparative  values  of  municipals,  and  the  above  is  an  attempt 
to  cover  the  subject  briefly.  Much  more  may  be  said.  Each  of  the  above 
subdivisions  is  a  study  in  itself. 


VALUATION  OF  BONDS  137 

Class  2 

Most  of  the  requirements  covering  bonds  in  Class  1  might  be  applied  to 
those  in  Class  2.  We  may  emphasize,  however,  that  the  purpose  of  the  issue, 
the  character  of  the  community  borrowing  the  money  and  the  legal  features 
must  be  more  carefully  investigated  in  determining  the  value  of  bonds  in 
Class  2,  as  against  direct  obligation  bonds  issued  by  States  and  their  political 
subdivisions. 

R.  M.  S. 

Differences  of  opinion  in  evaluating  bonds. — That  differ- 
ences of  opinion  exist  even  between  highly  competent  experts 
is  shown  by  a  consideration  of  the  bids  submitted  for  issues  of 
Binghamton,  New  York,  Bonds 


.10 


BINGHAMTON,  N.  Y.,  Oct.,   1921. 

Messrs.  Blodget  &  Co.  of  New  York  were  the  successful  bidders  for  the 
following  bonds  aggregating  $116,200,  paying  a  premium  of  $4,089.08 — 103.519, 
a  basis  of  4.96''7<?: 

Park  Creek  Imp.  10  1/4  year  (average) $  40,000 

Pierce  Creek  Imp.  9  1/4  year  (average) 36,000 

Oak  St.  School  9  1/4  year   (average) 18,000 

Broad  Ave.   School  8  1/4  year    (average) 16,700 

Cross  St.  Bridge  6  3/4  year   (average) 6,500 

Other  bidders  were: 

Barr  &  Schmeltzer    103.678 

Sherwood    &   Merrifield    102.64 

George   B.   Gibbons  &   Co 102.52 

C.    H.   White    102.186 

Ogilby  &  Austin    101.96 

Peoples    Trust    Co.,    Binghamton 101.749 

National  City  Co 101.639 

Rutter    &    Co 101.59 

Lamport,  Barker  &  Jennings 100.62 

The  bids  submitted  at  any  other  sale  would  show  a  simi- 
lar divergence  in  ideas  of  value. 

The  difference  between  the  high  and  low  bid  for  the  bonds 
referred  to  in  this  illustration  is  the  difference,  $3,368.64, 
between  the  premium  paid  by  the  high  bidder,  $4,089.08,  and 
the  premium  offered  by  the  low  bidder,  $720.44.  Availability 
for  sale  to  particular  customers  may  account  in  part  for  dis- 
crepancies in  bids. 

Sources  of  information. — The  sources  of  information  to 
which  the  prospective  purchaser  and  investigator  may  turn 
are   statements  prepared   by   officials   of  the   issuing  munici- 

"'The  Daily  Bond  Buyer,  October  21,  1921. 


138  MUNICIPAL  BONDS 

pality,  by  State  officers,  such  as  superintendents  of  banks, 
and  by  financial  publications. 

When  bids  are  solicited  for  an  issue  of  bonds,  it  is  cus-. 
tomary  for  the  city  officials  to  prepare  and  send  to  enquirers, 
and  to  publish  with  notice  of  sale,  a  "financial  statement" 
showing  the  gross  and  net  indebtedness,  assessed  valuations 
of  taxable  real  and  personal  property,  the  ratio  between  real 
and  assessed  valuations,  the  tax  rate,  and  population.  Such 
statements,  being  made  by  the  seller  and  by  officials  not 
always  conversant  with  the  best  practice,  should  be  carefully 
scanned.  For  an  example  of  such  statements  see  the  sum- 
mary financial  statements  following  Chapter  V. 

The  superintendents  of  banks  in  New  York,  Massachu- 
setts, and  Connecticut  (alas,  not  in  New  Jersey)  and  other 
States,  issue  from  time  to  time  lists  of  counties,  cities,  and 
other  political  divisions,  the  bonds  of  which  are  "legal  invest- 
ments" for  savings  banks,  trustees  and  fiduciaries  in  their 
respective  States.  A  summary,  compiled  from  such  a  state- 
ment issued  by  the  superintendent  of  banks  in  New  York 
follows  Chapter  XL  Such  statements  are  valuable  only  in 
that  they  establish  the  fact  that  bonds  of  the  included  cities, 
etc.,  are  "legal"  in  the  judgment  of  and  according  to  the  best 
information  the  issuing  official  has  been  able  to  obtain.  The 
omission  of  the  name  of  a  municipality  does  not  necessarily 
mean  its  bonds  are  not  "legal."  It  may  only  mean  that  its 
officials  have  been  lazy. 

The  most  available  and  the  most  reliable  source  of  in- 
formation is  the  Commercial  and  Financial  Chronicle,  pub- 
lished in  New  York  City  by  William  B.  Dana  Co.  In  the 
State  and  City  Supplement,  published  semi-annually,  complete 
and  accurate  municipal  statistics  may  be  found,  together  with 
abstracts  of  the  laws  of  the  various  States  governing  the 
issue  of  municipal  bonds.  The  greatest  care  is  taken  by  the 
publishers  to  make  and  keep  such  information  accurate  and 
timely,  and  statements  in  the  Chronicle  may  be  relied  upon. 

In  the  last  analysis,  the  estimation  of  bond  prices  suggests 
the  explanation  by  a  great  painter  of  his  brilliant  colours. 
When  asked  how  he  mixed  his  paints  to  obtain  such  results, 
he  replied:  "With  brains,  sir,  with  brains." 


Content  of  Advertisement  which  Appeared  in  the  New  York 
"Sun,"  November  i,  1921 


Twenty  Years  Ago 


BelotD  is  a  list  of  municipal  bonds  which  we  owned 
and      offered      for     sale     during      the      year     1901: 


CHICAGO 

204  Dearborn  Street 

( Marqu  ette  Bld'g.) 


NEW  YORK 

31  Nassau  Street 

(Nat'l  Bank  of  Commerce  Bld'g.) 


BOSTON 

67  Milk  Street 

(Equitable  Bld'g.) 


NEW  YORK,   1901 
We  own  and  offer,  subject  to  prior  sale  and  advance  in  price, 


the  following  bonds : 


Amount 


Name  of  Security 


Price  and      Net 
Rate     Maturing  in     Interest     Return 


f  30,000     State  of  New  York,   Registered 
200,000     State   of   Massachusetts 
50,000     City   of   Boston,   Massachusetts, 
Registered 
156,000     Detroit,  Michigan,  School 
200,000     Milwaukee,    Wisconsin,    School 
122,000     Buffalo,   New   York,   Registered 
100,000     Chicago,   Illinois 
50,000     Newark,   New  Jersey,   Water 
50,000     City   of   New   York,    Registered 
20,000     State  of  Louisiana,  Coupon 
100,000     State  of  Tennessee,   Registered 
523,000     City    of    Allegheny,    Pennsylvania, 

Registered 
125,000     Fort  Wayne,   Indiana,  School  City 
100,000     Greene  County,  Ohio,  Court  House 
45,000     Blackhawk    County,    Iowa,    Court 

House 
20,000     South   Bend,    Indiana 
100,000     Waukesha    County,    Wisconsin, 
Asylum 
71,500     Rock  Island,  Illinois.  School  District 
50,000     Clinton,  Iowa,  Ind.  School  District 

Refunding 
20,000     Colorado  Springs,  Colorado,  School 

District  Refunding 
42,000     St.  Joseph,  Missouri,  School  District 
38,000     Springfield.    Illinois,    Refunding 
25,000     Peoria,   Illinois.  Park  District 
15,000     Danville,  Illinois,  Refunding  School 
26.000     Lima.  Ohio,   Refunding 
200.000     Lee  County,   Iowa,   Refunding 
96,000     JeffersonvilJe.    Indiana 
25,000     Sanitary  District  of  Chicago 
25,000     Gallatin  County,  Illinois,  Refunding 
23,000     Council    Bluffs,    Iowa,    Refunding 
59.000     County  of  Cascade,  Montana 
46,000     City   of   Norfolk,   Virginia,   Imp. 

Refunding 
30,000     Nashville,    Tennessee,    Refunding 
125,000     City  of  Memphis,  Tenn.,   Sinking 

P'und,  Park 
100.000     Roane  County,  Tennessee.   Funding 
20,000     Bexar  County,  Texas,  Court  House 


3 

11  Years 

104 

2.55 

3 

38  Years 

104% 

2.83 

3  V, 

29  Years 

109% 

3.03 

3% 

28  Years 

109 

3.03 

av, 

1  to  20  Years 

Various 

3.05 

3% 

19  Years 

106% 

3.05 

4 

14  Years 

110% 

3.10 

4 

21  Years 

113% 

3.10 

3% 

27  Years 

106% 

3.12 

4 

13  Years 

109 

3.15 

3 

12  Years 

98 

3.20 

3% 

2  to  25  Years 

Various 

3.20 

3Vi 

5  to  20  Years 

Various 

3.20 

4 

5  to  29  Years 

Various 

3.20 

4 

10  Years 

106% 

3.20 

SVa 

10  Years 

102  Va 

3.20 

3.65 

4  to  21  Years 

Various 

3.25 

4 

5  Years 

103  Va 

3.25 

4 

10  Years 

1031/3 

3.25 

4 

20  Years 

104% 

3.25 

4 

9  to  19  Years 

105% 

3.30 

HVo 

20  Years 

102  ■% 

3.30 

•SVn 

20  Years 

102% 

3..30 

4 

8  to  10  Years 

Various 

3.30 

31/. 

24  to  29  Years 

103% 

3.30 

3% 

1  to  19  Years 

Various 

3.30 

3V, 

24  Years 

101 

3.45 

4Vo 

2  Years 

102.14 

3.50 

4 

7  to  10  Years 

Various 

3.50 

4  V. 

14  to  15  Years 

Various 

3.50 

4 

20  Years 

105% 

3.63 

4 

28  Years 

104 

3.70 

4 

17  Years 

103% 

3.70 

4 

12  to  29  Years 

Various 

3.80 

4 

20  Years 

101% 

3.875 

6 

33  Years 

105% 

3.875 

SPECIAL  CIRCULARS  ON  REQUEST 

The  remarkable  change  in  price  and  interest  return  on  similar  representative  issues 
In  the  twenty  years  intervening  may  be  seen  from  the  list  of  municipal  bonds  we 
now  offer  to  yield  from  5%  to  6%.  In  some  instances  these  are  Issued  by  the  same 
municipalities  whose  bonds  we  offered  twenty  years  ago.  We  shall  be  pleased  to 
send  circulars  describing  our  present  offerings  in  detail.  We  suggest  you  ask  for 
List  W-11. 

HARRIS,  FORBES  &  COMPANY 
Pine  Street,  Corner  William,  New  York 


Harris,  Forbes  &  Company 

Incorporated 

Boston 


Harris  Trust  and  Savings  Bank 

Bond  Department 

Chicago 


139 


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140 


VALUATION  OF  BONDS  141 
New  Bond  Offerings  of  the  Week  Ended  Dec.  i6,  1921  * 

Interest  Term  of  Yield 

Amount                        Description  Rate  Years  Per  Cent 

5      100,000     City   of   St.    Petersburg,    Fla.,    im- 
provement    6  9-30  5.50  to  5.60 

100,000     Richmond     County,     N.     C,     court 

house   6  10-30  5.25  to  5.50 

2,250,000    Little  Rock  and  North  Little  Rock, 

Ark.,  bridge    5-1/2  1-29  5.30  to  5.50 

503,000     Harris    Co.,   Texas,    Houston    Ship 

Channel  5  1-28  5 

1,200,000     City  of  Lexington,   Ky.,   municipal 

improvements    5  4-39  4.50  to  4.70 

181,000    Stephens  Co.,  Tex 5-1/2  3-6  6-1/4 

515,500     City  of  Wilmington,  Del 5  34-36  4.30 

500,000     Allegheny   County,   Pa.,   tunnel....  4-1/2  5-27  4.25 

2,000,000     Mississippi     Co.,     Ark.,     drainage 

district   6  4-21  6.25 

85,000    City  of  Tonawanda,  N.  Y.,  school  5  2-31  4.20  to  4.75 

486,000     City    and    County    of    California, 

water 4-1/2  3-17  4.65  to  4.80 

39,000    Gloucester  Co.,  N.  J.,  road 6  1-5  4.80 

42,000    Ocean  City,  N.  J.,  improvement...  6  2-12  5.20  to  5.40 

1,500,000     State  of  Mississippi 4-3/4  3-26  4.40  to  4.70 

1,200,000    City  of  Charlotte,  N.  C 5-1/4  3-41  4.80  to  4.90 

399,500     City  of  Calgary,  Alberta 6  30-50  6 

456,000     Summit  Co.,  Ohio,  road 6  2-7  4.80 

80,000    City  of  Yakima,  Wash.,  sewer....  6  20  5.15 

117,000    Town    of    Westfield,    N.    J.,    im- 
provement     5-1/2  2-30  4.40  to  4.60 

1,000,000    Ouachita  Parish,  La.,  road 6  1-38  5.60  to  6 

3,015,000    Los  Angeles  City,   School   District, 

Cal 5-1/2  2-39  4.60  to  4.90 

7,360,000     City    of    Buffalo,     N.    Y.,    school, 

hospital  and  sewage 4-1/2  1-21  4.05  to  4.20 

450,000    Yazoo  -  Mississippi     Delta     Levee 

District    4-1/2  5.35  5.20 

1,100,000    Dunklin  Co.,  Mo 5  3-21  5.10 

55,000,000     City  of  New  York  corporate  stock    4-1/2  50  4.25 

*  From  the  New  York  Times. 


142 


MUNICIPAL  BONDS 


New  Bond  Offerings  of  the  Week  Ended 

Interest 

Amount  Description  Rate 

\,      116,000     Duval   County,  Fla.,  bridge 5 

1,264,000     City  of  Bayonne,  N.  J.,  school  and 

improvement   5 

1,500,000     State  of  Mississippi  improvement.  .  4-3/4 

2,310,000    Allegheny  Co.,  Pa.,  road  and  bridge  4-1/2 

7,000,000     State  of  California  highway 5 

175,000     City  of  Pueblo,  Col.,  public  way  **  5 

216,000     Sumter  Co.,   Ga.,  improvement 5 

180,000    City  of  Portland,  Ore.,  improvement  5 

260,000     Springfield,  Ohio,  school 5-1/2 

230,000    Nogales,  Ariz.,  water 5-1/2 

140,000    Carter  Co.,  Tenn 6 

*  From  the  New  York  Times. 
»*  Optional,  Nov.  1,  1931. 


Dec.  30,  1921  * 


Term  of 

Yield 

Years 

Per  Cent 

37 

4.875 

3-30 

4.40  to  4.60 

2-25 

4.40  to  4.70 

1-30 

4.15 

22-28 

4.30 

15 

5 

2-28 

4.80 

4-31 

4.40  to  4.70 

7-28 

4.65  to  4.80 

15-29 

5.70  to  5.80 

30 

5.40 

Results  of  New  York  City  Bond  Sales 


Date  of  Sale 
and  Amount 

Interest 
Rate 

Years 

Average 
Price 

Income 
Basis 

Dec.  15,  1921 

$55,000,000 

4-1/2 

50 

103.407 

4.333 

July  12,  1917 

$47,500,000 

7,500,000 

4-1/2 
4-1/2 

50 
1-15  Sen 

100.6507 
100.6507 

4.46 
4.39 

April  19,  1916 
$40,000,000 
15,000,000 

4-1/4 
4-1/4 

50 
1-15  Sen 

102.618 
101.432 

4.126 
4,028 

June  29,  1915 

$46,000,000 
25,000,000 

4-1/2 
4-1/2 

50 
1-15  Sen 

101.253 
101.306 

4.437 
4.297 

April  15,  1914 
$65,000,000 

4-1/4 

50 

101.45 

4.18 

May  20,  1913 
$45,000,000 

4-1/2 

50 

101.137 

4.49 

May  7,  1912 

$65,000,000 

4-1/4 

50 

100.747 

4.214 

VALUATION  OF  BONDS 
Results  of  New  York  City  Bond  Sales — Continued 


143 


Date  of  Sale 
and  Amount 

Interest 
Rate 

Years 

Average 
Price 

Incomi 
Basis 

Jan.  24,  1911 
$60,000,000 

4-1/4 

50 

100.904 

4.207 

March  21,  1910 
$50,000,000 

4-1/4 

20-50 

101.28 

4.155 

Dec.  10,  1909 
$12,500,000 

4 

50 

100.34 

3.98 

June  8,  1909 

$38,000,000 

2,000,000 

4 
4 

50 
10 

100.71 
100.14 

3.96 
3.98 

March  2,  1909 
$10,000,000 

4 

50 

101.57 

3.93 

Nov.  23,  1908 
$12,000,000 
500,000 

4 

4 

50 
10 

102.385 
101.52 

3.89 
3.82 

Feb.  14,  1908 

$47,000,000 

3,000,000 

4-1/2 
4-1/2 

50 
10 

104.22 
10090 

4.29 
4.38 

Sept.  10,  1907 
$35,000,000 
5,000,000 

4-1/2 
4-1/2 

50 
10 

102.063 
100.30 

4.39 
4.46 

Wholesale  Prices  in  the  United  States  for  no  Years 


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Content  of  Advertisement  Showing  Offering  of  $31,800,000 
State  of  New  York  Gold  5%  Bonds* 

$31,800,000,  State  of  New  York,  Gold  S%  Bonds 

Dated  January  1  and  March  1,  1921  Due  serially  1922  to  1971,  inclusive 

Principal  and  semi-annual   interest  payable  in   gold  at   the  Bank   of   the  Man- 
hattan Company,   New   York  City.     Coupon   bonds  in  the  denomination   of 
$1,000,  which  may   be  exchanged  for  bonds  registered  as  to  principal 
and  interest  in  denominations  of  $1,000,  $5,000,  $10,000  and  $50,000. 

Exempt  from  the  New  York  State  Income  Tax,  and  free  from  all  Fed- 
eral Income  Taxes.    Legal  investment  for  Savings  Banks  and  Trustees 
in  New  York,  all  New  England  and  in  other  States. 

Eligible  as  security  for  Postal  Savings  Deposits. 

Acceptable  to  the  State  of  New  York  as  security  for  State  Deposits,  to 

the   Superintendent   of   Insurance   to    secure   policyholders   and    to    the 

Superintendent  of  Banks  in  trust  for  banks  and  trust  companies. 

The  assessed  valuation  of  property  subject  to  taxation  for  State  purposes  is 
officially  reported  as  $14,850,989,607.  The  gross  bonded  debt,  including  this 
issue,  is  $267,729,000.  Sinking  funds  are  $76,218,877,  making  a  net  bonded 
debt  of  $191,510,123,  or  about  l%%  of  the  assessed  valuation.  The  popula- 
tion, according  to  the  U.  S.  Census  for  1920,  was  10,384,829.  The  outstanding 
debt  of  the  State  is  secured  by  taxes  levied  to  meet  principal  and  interest  at 
maturity.  The  present  offering  consists  of  $20,000,000  bonds  for  Highways, 
$6,800,000  for  Barge  Canal  Terminals  and  $5,000,000  for  the  acquisition  of 
lands  for  the  State  Forest  Preserve,  and  matures  $500,000  March  1  and  $136,000 
January  1  each  year  from  1922  to  1971  inclusive. 


MATURITIES,  AMOUNTS  AND  PRICES 

(Accrued  interest  to  be  added) 

Maturity 

Amount 
$636,000 

Price    Yi 

eldAJjou 

5.25% 

t    Maturity 
1047 

Amount 
$030,000 

Price 

Yield  Alout 

1922 

99.85 

104.44 

4.70%, 

1923 

636,000 

99.02 

5.25% 

1948 

630.000 

104.53 

4.70% 

1924 

636,000 

99.39 

5.25% 

1949 

636,000 

104.62 

4.70% 

1925 

630,000 

99.18 

5.25% 

1950 

636,000 

104.70 

4.70% 

1926 

636,000 

99.19 

5.20%, 

1951 

036,000 

104.77 

4.70% 

1927 

636,000 

99.28 

5.15% 

1952 

636,000 

104.85 

4.70% 

1928 

636,000 

99.44 

5.10% 

1953 

636,000 

104.92 

4.70%, 

1929 

636,000 

99.69 

5.05%, 

1954 

636,000 

104.99 

4.70% 

1930 

636,000 

100.00 

5.00% 

1955 

63(i,000 

105.05 

4.70% 

1931 

636,000 

100.37 

4.95% 

1956 

636,000 

105.11 

4.70% 

1932 

636,000 

100.83 

4.90% 

1957 

636,000 

105.17 

4.70% 

1933 

636,000 

101.32 

4.85% 

1958 

636,000 

105.22 

4.70% 

1934 

636,000 

101.88 

4.80% 

1959 

636,000 

105.28 

4.70% 

1935 

636,000 

102.49 

4.75% 

1960 

636,000 

105.33 

4.70% 

1936 

636,000 

102.61 

4.75% 

1961 

636,000 

105.37 

4.70% 

1937 

636,000 

102.75 

4.75% 

1962 

636,000 

105.42 

4.70% 

1938 

636,000 

102.85 

4.75% 

1963 

636,000 

105.40 

4.70% 

1939 

636,000 

102.96 

4.75% 

1964 

636,000 

105.51 

4.70% 

1940 

036,000 

103.07 

4.75% 

1905 

030,000 

105.55 

4.70% 

1941 

636,000 

103.82 

4.70% 

1966 

636,000 

105.58 

4.70% 

1942 

636,000 

103.93 

4.70% 

1967 

636,000 

105.02 

4.70% 

1943 

636,000 

104.05 

4.70% 

1968 

636,000 

105.65 

4.70% 

1944 

636,000 

104.15 

4.70% 

1909 

036,000 

105.69 

4.70% 

1945 

036.000 

104.25 

4.70% 

1970 

636,000 

105.72 

4.70%, 

1946 

636,000 

104.35 

4.70% 

1971 

636,000 

105.75 

4.70% 

The  above  information  is  based 

upon  ofBcial  statements  and  statistics  on  which  we 

have  relied 

in  the  purchase  of 

these  bonds 

.     We  do  not  guarantee 

but 

:  believe 

it  to  be  correct. 

First  National  Bank,  New  York — Bankers  Trust  Company — Harris,  Forbes 
&  Company — The  National  City  Company — Guaranty  Company  of  New  York — 
Brown  Brothers  &  Company — E.  H.  Rollins  &  Sons — Kissel,  Kinnicutt  &  Co. — 
Potter  Brothers  &  Co. — Bernhard,  Scholle  &  Co. — Remick,  Hodges  &  Company — 
William  R.  Compton  Co. — Eastman,  Dillon  &  Co. — Redmond  &  Co. — Stacy  & 
Braun — Robert  Winthrop  &  Co. 

*  From  the  New  York  Sun,  June  10,  1921. 

144 


Chapter  XV 
INCONTESTABILITY  AND  VALIDATION 

Improvement  in  civic  sense  of  honesty. — In  the  merry 
days  of  reconstruction,  expansion  and  industrial  development 
following  the  war  between  the  States,  repudiation  of  munici- 
pal bond  issues  was  not  only  frequent,  but  seemed  in  many 
cases  not  to  be  regarded  as  bad  faith.  However,  a  default 
in  payment  of  interest  or  principal,  then  as  now,  almost  in- 
variably involved  a  moral  default.  That  there  has  been  an 
improvement  in  standards  of  business  ethics  in  the  last  gen- 
eration is  a  matter  of  common  knowledge  and  it  is  gratifying 
to  record  that  the  civic  sense  of  honesty  leads  the  business 
sense  of  fair  dealing.  It  is  not  that  "business  methods  have 
been  applied  to  politics,"  but  political  methods  have  been 
applied  to  business. 

Nevertheless  defaults  do  occur,  and  with  sufficient  fre- 
quency to  keep  the  investment  banker,  the  purchaser  of  bonds, 
and  the  skilled  specialist  ever  on  the  alert.  That  the  number 
is  decreasing  is  due  to  many  reasons,  not  the  least  being  the 
knowledge  that  honesty  not  only  is  the  best  policy,  but  that 
honesty  is  absolutely  essential  if  the  municipal  corporation  is 
to  continue  to  function.  A  reputation  for  default,  even  for 
tardiness,  makes  it  difficult  for  the  municipahty  to  borrow  for 
any  purpose. 

Progress  on  legal  side. — Great  progress  has  been  made 
on  the  legal  side.  As  municipal  bonds  must  be  authorized  by 
statute,  general  or  special,  statutes  are  better  drafted  avoid- 
ing the  errors  shown  by  experience.  Practical  experience  and 
legal  skill  have  joined  forces  to  produce  sound  and  workable 
laws,  the  object  of  which  is  the  protection  of  the  investor, 
until  today  the  fiscal  legislation  of  many  States  in  this  coun- 
try leaves  little  to  be  desired,  either  in  form  or  substance. 
Among  statutes  of  this  kind  are  Arthur  N.  Pierson's  Act  to 
Regulate  the  Issue  of  Bonds  by  New  Jersey  Municipalities,^ 

'P.  L.,  1917,  Chap.  240. 

145 


146  MUNICIPAL  BONDS 

and  William  Henry  Hoyt's  Municipal  Finance  Act  for  North 
Carolina,-  both  of  which  have  been  improved  and  marred 
by  subsequent  tinkering. 

Imperfection  of  all  legislation. — The  history  of  legisla- 
tion, and  indeed  of  all  law,  has  shown  that  the  mind  of  man 
cannot  create  statutes  or  laws  which  are  perfect  or  in  which 
the  trained  (not  to  mention  the  criminal)  mind  cannot  detect 
flaws.  This  has  been  true  with  fiscal  legislation.  Where  de- 
fault has  seemed  advisable,  necessary  or  inevitable  to  the 
imperfect  moral  sense,  opportunity  has  not  been  lacking  to 
hang  the  default  upon  the  peg  of  illegality.  To  anticipate 
the  consequences  of  a  desire  for  repudiation  is  the  business  of 
the  draftsman  of  fiscal  legislation,  and  in  examining  such  leg- 
islation we  find  various  expedients  which  tend  to  make  default 
difficult  or  impossible  or  assure  legality  of  the  bonds,  in 
advance  of  issue. 

Estoppel. — First  among  such  devices  is  employment  of 
the  legal  doctrine  of  estoppel,  by  which  is  meant  that  under 
certain  circumstances  we  may  not  deny  the  truth  or  propriety 
of  what  we  have  previously  said  or  done.  So  a  municipality 
having  the  power  to  issue  bonds,  may  be  estopped,  or  pre- 
vented, by  recitals  in  the  bonds,  from  denying  their  legality. 
The  effect  of  Judge  Dillon's  estoppel  clause  has  been  referred 
to  in  Chapter  I,  and  the  language  of  the  clause  given  in  the 
bond  forms  in  and  following  that  chapter.  The  force  of  such 
an  estoppel  rests  upon  the  rule  that  the  municipality  can  be 
bound  by  the  agents  or  officers,  by  whom  alone  it  can  act,  if 
they  "keep  within  the  limits  of  the  chartered  authority  of 
the  corporation."  ^  The  doctrine  is  asserted  for  the  protec- 
tion of  the  bondholder  and  ordinarily  has  "no  place  in  con- 
troversies which  arise  before  the  issue  of  the  bonds."  * 

Provision  can,  however,  be  made  in  advance  of  the  issue, 
to  give  effect  to  estoppel.  A  New  York  statute  reads:  "An 
ordinance  creating  a  funded  debt  may  provide  that  the  bonds 
therein  authorized  shall  contain  a  recital  that  they  are  issued 
pursuant  to  law  and  an  ordinance  of  the  common  council,  as 
provided  by  section  sixty  of  the  Second-class  Cities  Law.  Such 
recital,  when  so  authorized,  as  aforesaid,  shall  be  conclusive 
evidence  of  the  regularity  of  the  issue  of  said  bonds  and  of 

^P.  L.,  1917,  Chap.  138,  as  last  revised  by  an  Act  ratified  December  20, 
1921. 

'Dillon,  p.  1179. 
*Id.,  p.  585. 


INCONTESTABILITY  AND  VALIDATION    147 

their  validity."  ^  And  it  would  be  so,  provided  that  the 
city  had  the  power  to  issue  the  bonds.  As  to  irregularities 
in  the  proceedings  preliminary  to  issue,  such  recital  is  con- 
clusive.^ 

As  questions  of  power  are  sometimes  questions  of  limita- 
tion, some  statutes  provide  that  the  determination  of  certain 
facts  by  certain  officials  shall  be  final.  The  New  Jersey  Bond 
Act  provides  that:  "The  determination  of  the  governing  body 
as  to  the  classification  of  purposes  *  *  *  for  which  bonds 
are  issued  and  as  to  the  probable  period  of  the  usefulness  of 
any  improvement  or  property,  and  as  to  the  maturities  of  the 
proposed  bonds  based  thereon,  shall,  upon  a  majority  vote 
of  all  the  members  of  such  body  in  office,  be  conclusive  in  any 
action  or  proceeding  involving  the  validity  of  said  bonds."  '^ 
The  doctrine  of  estoppel  is  invoked  in  advance  of  issue  and 
the  effect  of  such  a  statutory  provision  depends  upon  it. 

Short  statutes  of  limitations. — By  a  statute  of  limitations, 
sometimes  aptly  called  a  statute  of  repose,  is  meant  a  statu- 
tory provision  that  lawsuits  must  be  begun  within  a  stated 
period,  longer  or  shorter  according  to  the  facts  and  character 
of  the  lawsuit  or  action.  For  example,  in  many  States  a  suit 
brought  to  recover  damages  for  breach  of  a  contract  must  be 
commenced  within  six  years  from  the  time  the  cause  of  action 
arose.  In  applying  such  statutes  in  practice,  the  courts  say 
in  effect:  "You  must  not  sleep  on  your  rights.  If  you  come 
here  for  redress,  you  must  come  promptly.  Otherwise,  the 
legislature  says  you  may  not  take  up  our  time." 

An  application  of  this  principle  is  found  in  the  New  Jer- 
sey statute  so  frequently  quoted.  After  an  ordinance  or  reso- 
lution is  adopted,  it  is  required  to  be  published.  "The  clerk 
shall  publish  with  such  ordinance  or  resolution  a  statement  in 
substantially  the  following  form:  The  foregoing    (ordinance 

or  resolution)  was   (adopted  or  approved)   on  the  day 

of  ,   19 — .     The  bonds  authorized  thereby 

will  be  issued  and  delivered  after  the day  of , 

19 —  (specifying  a  day  not  less  than  twenty  days  after  the 
first  publication),  and  any  suit,  action  or  proceeding  to  set 
aside  or  vacate  this  (ordinance  or  resolution)  must  be  begun 
within  twenty  days  after  the  publication  of  this  statement."  ^ 

°  Cons.  Laws,  Chap.  53,  Sec.  60. 

"Dillon,  p.  1179. 

'P.  L.,  1917,  Chap.  240,  Sec.  4  (4). 

"P.  L.,  1917,  Chap.  240,  Sec.  2  (1)    (d). 


148  MUNICIPAL  BONDS 

In  construing  and  applying  this  provision,  the  Supreme 
Court  of  New  Jersey  said:  "*  *  *  in  the  absence  of  the 
protest  provided  for  by  the  act,  we  are  compelled  to  the  con- 
clusive presumption  that  the  ordinance  was  duly  and  regu- 
larly passed  and  complied  with  the  statute;  by  express  statu- 
tory provision  the  validity  of  the  ordinance  cannot  be  ques- 
tioned, since  no  action  or  proceeding  was  commenced  prior 
to  the  expiration  of  the  20  days."  ^  The  presumption  would 
not  be  conclusive  in  a  case  where  there  was  no  lawful 
authority  to  issue  the  bonds. 

Validation  by  decree. — It  has  been  noted  in  this  book  and 
by  other  observers  ^°  that  the  tendency  of  the  courts  is  to 
hold  bonds  valid  when  in  the  hands  of  innocent  purchasers 
for  value,  without  notice  and  before  maturity.  Such  a  result 
inevitably  followed  the  application  of  the  Law  Merchant 
and  the  Uniform  Negotiable  Instruments  Law,  to  municipal 
bonds.  Unfortunately,  such  adjudications  follow  defaults 
and  do  not  precede  them;  and  it  is  greatly  to  be  desired  that 
conclusive  adjudications,  determining  the  legality  of  bond 
issues,  should  precede  issue.  Such  a  result  is  attempted  to  be 
secured  in  two  ways,  that  is,  by  submitting  the  record  and  pro- 
ceedings, before  issue,  to  (a)  an  administrative  department, 
or  (b)  the  courts,  so  that  a  judgment  may  be  secured,  binding 
not  only  on  all  parties  to  the  proceeding,  but  on  all  those 
who  might  properly  be  parties,  in  the  present  and  in  the 
future.  The  legal  doctrine  of  res  adjudicata  is  outside  the 
scope  of  this  essay,  but  as  it  underlies  the  idea  of  validation 
by  decree,  it  is  necessary  to  define  the  term.  By  res  adjudi- 
cata is  meant  that  all  questions  which  might  have  been  deter- 
mined in  a  litigation  based  upon  the  facts  are  so  determined 
whether  specifically  presented  for  determination,  or  not,  and, 
theoretically,  at  least,  not  only  as  between  the  parties,  but  as 
to  all  persons  who  might  have  been  or  properly  could  be  made 
parties.  In  short.  If  a  court  says  a  bond  issue  is  legal,  it  is  so, 
even  though  all  the  defects  in  the  proceedings  are  not  brought 
to  the  attention  of  the  court. 

The  effectiveness  of  statutes  providing  for  such  valida- 
tion, that  is,  by  administrative  or  judicial  decree,  depends 
upon  constitutional  limitations  in  those  States  where  the  line 

'Dale  v.  Bayhead  (1917),  90  N.  J.  Law  49,  100  Atl.  329;  see  also  Walters 
V.  Bayonne  (1918),  89  N.  J.  Equity  384,  104  Atl.  770. 

**Lagerquist,  p.  575;  Chamberlain,  p.  236;  Jordan,  p.  82  and  others. 


INCONTESTABILITY  AND  VALIDATION    149 

of  demarcation  Is  clearly  drawn  between  the  legislative,  judi- 
cial, and  executive  departments  of  government.  In  such 
States  it  is  not  competent  for  the  legislature  to  impose  judi- 
cial functions  upon  the  executive,  or  legislative  functions  upon 
the  courts. 

An  attempt  to  authorize  a  governmental  department  to 
exercise  judicial  and  legislative  functions  in  New  York,  where 
such  limitations  exist,  has  been  made  by  the  Education  Law 
and  the  General  Municipal  Law. 

The  Education  Law.^^ — This  statute  provides  that  a 
trustee,  board  of  education,  elector  or  taxpayer  of  a  school 
district,  or  a  purchaser  of  its  bonds,  may  institute  a  proceed- 
ing before  the  commissioner  of  education  for  the  purpose, 
among  others,  of  "legalizing  and  validating  the  bonds"  of 
the  school  district.  If  it  appear  to  the  commissioner  of  edu- 
cation that  the  proceedings  taken  "substantially  comply"  with 
the  statute  "he  shall  render  a  decision  ratifying  and  confirm- 
ing such  acts  and  proceedings."  In  other  words,  he  may  say 
the  law  has  been  observed.  But  the  statute  goes  on  to  say: 
"If  there  has  been  a  fair  expression  of  the  will  of  the  qualified 
electors  of  the  district,  and  it  appears  that  the  action  taken 
was  not  affected  or  prejudiced  by  defects  in,  or  failure  to  give, 
the  notice  required  by  statute,  or  if  it  appears  that  the  fail- 
ure to  take,  or  a  defect  in  any  step  in  the  acts  or  proceedings 
of  district  officers  or  meetings  did  not  influence  materially, 
the  result  of  such  meetings,  the  commissioner  may  disregard 
such  defects  or  failure  and  determine  that  there  has  been  a 
substantial  compliance  with  the  statute." 

The  statute  has  not  been  passed  upon  by  the  courts,  but 
in  view  of  the  principle  stated  above,  and  the  language  of  the 
Supreme  Court  in  the  Lackawanna  case  hereafter  referred  to, 
it  is  to  be  assumed  that  the  attempt  to  vest  the  commissioners 
of  education  with  judicial  functions  is  unconstitutional. 

The  General  Municipal  Law.^- — This  statute  provides  for 
a  proceeding  in  the  Supreme  Court,  based  upon  a  petition 
made  by  interested  parties  (that  is,  municipal  officials,  tax- 
payers, purchasers  or  holders  of  the  bonds)  setting  forth  all 
facts  in  relation  to  the  bond  issue  "for  the  purpose  of  legaliz- 
ing and  confirming  such  proceedings  *  *  *  and  also  the  issu- 
ance, sale  and  form  of  such  bonds."    The  court  is  given  juris- 

"  Cons.  Laws,  Chap.  16,  Sec.  480,  sub.  7,  added  by  Laws  of  1917,  p.  1276, 
"  Cons.  Laws,  Chap.  24,  Sees.  22  to  29. 


150  MUNICIPAL  BONDS 

diction  to  determine  that  the  statute  authorizing  the  bonds 
"was  substantially  complied  with"  if  certain  conditions  speci- 
fied in  the  act  have  been  complied  with,  "notwithstanding  any 
irregularity  or  technicality"  mentioned  in  the  act. 

In  construing  this  statute  in  the  Lackawanna  case  ^^  the 
court  said:  "There  is,  then,  found  in  'the  statute'  a  simple 
and  comprehensive  legislative  scheme  whereby  the  legislature 
has  declared  in  substance  that  all  municipal  bond  issues  shall 
be  valid,  wherein  the  sole  objection  thereto  lies  in  certain 
specified  and  defined  technical  irregularities,  and  whereby 
there  is  committed  to  the  Supreme  Court  the  purely  judicial 
function  of  determining  in  each  instance  where  the  statute  is 
involved  the  question  of  fact  ^^  of  whether  there  are  or  not 
any  other  irregularities  than  those  mentioned  in  such  statute. 
It  is  thus  made  clear  that  the  bond  issues  acquire  their  validity 
solely  from  the  legislative  enactment  and  not  from  the  court, 
and  there  is,  therefore,  no  legislative  function  committed  to 
the  court."  In  other  words,  if  the  bonds  are  authorized  by 
the  statute  and  the  proceedings  are  regular,  the  court  may 
say  so,  but  it  has  no  jurisdiction  to  declare  the  bonds  legal, 
if  they  are  not. 

The  two  preceding  illustrations  are  given  to  show  the 
difficulties  of  validation  by  decree  where  the  State  constitu- 
tion contains  inhibitions.  In  the  words  of  the  Bishop  of 
Rum-ti-f oo :  "No;  that  is  a  length  to  which,  I  trow,  Colonial 
Bishops  cannot  go.  You  may  express  surprise"  to  find  that 
there  are  constitutional  limits  to  legislation.  Legislative 
draftsmen  and  legislators  frequently  find  it  is  so. 

Judicial  validation  in  Georgia. — In  Georgia,  however,  as 
in  France  "they  order  this  matter  better,"  or  at  least  a  con- 
stitutional, workable  scheme  of  judicial  validation  has  been 
enacted.     This  statutory  plan  in  substance  is  as  follows  :^^ 

When  a  proposition  to  issue  bonds  has  been  adopted  at 
an  election,  notice  is  given  to  a  designated  State  official,  who 
begins  an  action  against  the  county  or  municipality  which 
desires  to  issue  the  bonds.  An  order  is  obtained  directing  the 
county  or  municipality  to  show  cause  "why  the  bonds  should 
not  be  confirmed  and  validated."  A  hearing  is  had  and  deter- 
mination made  as  to  "all  the  questions  of  law  and  of  fact." 

^Matter  of  Lackawanna  (1913),  158  App.  Div.  263, 

"Italics  mine. — F.  B. 

>*  Civil  Code  1910;  Sec.  445  et  seq. 


INCONTESTABILITY  AND  VALIDATION     151 

If  the  proceedings  are  approved,  and  there  appears  to  be  no 
difficulty  about  it,  for  the  defendant  municipality  or  county 
wants  the  bonds  issued,  a  judgment  is  entered.  The  effect  of 
such  judgment  is  "forever  conclusive  upon  the  validity  of  the 
bonds  against  the  county,  municipality,  or  division,  and  the 
validity  of  said  bonds  shall  never  be  called  in  question  in  any 
court"  of  the  State  of  Georgia. 

An  objecting  taxpayer  can  intervene  in  the  action  and 
attack  the  regularity  of  the  proceedings.  The  act  requires 
due  notice,  constructive  but  nevertheless  legally  sufficient,  and 
is  sound  in  principle. 

Judicial  validation  sustained. — Such  validation  has  been 
sustained.  A  typical  instance  of  litigation  in  which  the  con- 
stitutionality of  the  statute  was  sustained  by  inference  and  a 
possible  default  prevented,  is  Dumas  v.  Rigdon}^  Certain 
taxpayers  of  Tift  County,  Georgia,  sought  to  restrain  the 
collection  of  a  tax  levied  for  the  purpose  of  paying  the  prin- 
cipal and  interest  of  bonds  of  the  Chula  School  District,  on 
the  ground  that  the  district  had  never  been  legally  created. 

The  bonds  were  issued  in  1918,  shortly  after  the  district 
was  laid  off  by  the  county  board  of  education,  and  the  order 
validating  the  bonds  was  made  in  August,  1918. 

In  support  of  the  application  for  an  injunction,  it  was 
alleged:  "that  the  entire  territory  of  Tift  County  has  never 
been  laid  off  into  school  districts,  nor  have  the  district  lines 
been  defined  and  marked  as  required  by  law,  nor  have  the 
school  districts  been  laid  off  according  to  law,  but  they  have 
been  laid  off  in  disregard  of  the  provisions  of  the  statutes 
upon  that  subject;  that  no  map  of  the  county  showing  the 
school  districts,  as  required  by  law,  has  been  made;  that  cer- 
tain specified  lots  were  illegally  transferred  to  the  Chula  dis- 
trict: that  several  lots  in  the  county  were  not  in  any  school 
district,  and  that  some  four  or  five  lots,  containing  an  aggre- 
gate of  some  2,000  acres  of  land,  were  illegally  taken  from 
the  Chula  district;  that,  upon  other  grounds  specified,  a  divi- 
sion of  the  county  into  school  districts,  if  ever  made,  was 
illegally  made,  without  reference  to  best  interest  and  the  con- 
venience of  those  who  were  Included  in  and  excluded  from 
the  district;  that  the  territory  from  which  the  tax  is  to  be 
collected  Is  Incapable  of  exact  determination,   never  having 

"  (1921),  151  Ga.  267,  106  S.  E.  261. 


152  MUNICIPAL  BONDS 

been  exactly  laid  out,  marked,  and  defined,  as  required  by 
law." 

The  Georgia  Supreme  Court,  sustaining  the  judgment  of 
the  lower  court  refusing  an  injunction,  said : 

"The  bonds  in  question  were  duly  validated  in  accordance 
with  the  provisions  of  the  Civil  Code  1910,  Sec.  445  et  seq., 
relating  to  bonds  and  their  validation.  Questions  of  whether 
the  law  in  regard  to  laying  off  the  country  into  school  districts 
had  been  complied  with,  and  whether  other  steps  were  taken 
by  the  proper  county  authorities  to  make  this  laying  off  and 
division  of  the  county  into  school  districts  conformable  to 
law,  as  embodied  in  section  1531  et  seq.,  of  the  Civil  Code, 
upon  the  subject  of  school  districts  and  local  tax  for  public 
schools,  could  and  should  have  been  made  in  the  proceedings 
to  validate  the  bonds,  the  legality  of  which  is  now  challenged." 

Registration. — Differing  from  validation  by  decree,  more 
in  form  than  in  substance,  is  registration  of  bond  issues  with 
public,  usually  State,  officials.  Registration  in  this  sense  is  not 
the  same  in  its  legal  effect  as  the  registration  referred  to  in 
Chapter  II.  When  a  bond  Is  registered  with  a  public  official, 
it  is  presented  to  the  official  and  a  notation  in  a  proper  record 
book  is  made,  describing  the  bond  by  its  number,  date,  pur- 
pose, maturity,  interest  rate,  and  other  details.  Such  regis- 
tration is  intended  to  preserve  a  public  record  of  the  issue 
of  the  bonds.  The  effect  of  such  registration  depends  upon 
the  statute  pursuant  to  which  the  bond  is  registered.  The 
constitutional  difficulty  above  referred  to  may  exist  as  to 
registration  of  this  sort,  but  assuming  it  does  not,  the  regis- 
tration is  of  two  kinds: 

(a)  Where  judicial  functions  are  performed  by  the  regis- 
tering official,  in  which  case  registration  may  be  conclusive  as 
to  validity  (or  not)  according  to  the  statute; 

(b)  Where  ministerial  functions  only  are  performed, 
that  is,  there  is  no  discretion  with  the  registering  official,  in 
which  case  registration  ordinarily  does  not  validate  the  issue. 

"The  effect  of  registration  pursuant  to  statute,"  says 
Judge  Dillon,  "is  to  be  determined  by  the  language  and  intent 
of  the  enactment.  If  from  a  consideration  of  the  language 
used,  and  a  reasonable  construction  thereof,  it  appears  that 
the  legislature  Intended  to  entrust  to  an  officer  the  duty  of 
determining  the  validity  of  the  bonds  before  registering  them, 
his  certificate  of  registration  is  an  adjudication  of  validity 


INCONTESTABILITY  AND  VALIDATION    153 

which  operates  as  an  estoppel.  If,  however,  the  statute  ex- 
pressly declares  that  registration  and  the  certification  of  the 
officer  shall  not  have  this  effect,  or  that  the  certificate  shall 
only  be  prima  facie  evidence  of  the  facts  stated  and  shall  not 
prevent  proof  to  the  contrary  in  any  suit  involving  the 
validity  of  the  bonds,  or  the  power  and  authority  of  the  mu- 
nicipality in  whose  name  they  are  executed,  to  issue  them,  all 
conclusive  effect  must  be  denied  to  the  registration  and  the 
certificate."  ^'^ 

It  should  be  noted  that  if  the  statute  pursuant  to  which 
bonds  are  issued,  requires  registration  and  certification  as  a 
condition  precedent  to  validity,  such  registration  and  certifica- 
tion is  essential  to  the  complete  execution  of  the  instruments 
so  as  to  bind  the  municipality  for  their  payment. ^^ 

Certification  of  signatures  and  seal. — If  a  bond  is  stolen 
before  it  has  been  issued  by  the  municipal  authorities,  it  has 
no  legal  inception,  and  it  is  inoperative  even  in  the  hands  of 
a  bona  fide  purchaser  for  value. ^^  Hence  if  a  blank  bond 
which  is  ready  for  execution  but  has  not  been  executed,  is 
stolen  and  the  signatures  and  seal  forged,  the  municipality  is 
not  liable,  except  possibly  where  the  facts  show  gross  negli- 
gence, in  which  case  the  recovery,  if  any,  would  be  because  of 
such  negligence.  The  condition  of  the  law  in  this  respect  is 
comforting  to  the  municipality,  but  would  hardly  add  to  the 
happiness  of  an  innocent  holder  for  value  of  forged  securities. 

Forgery  is  an  ever-present  and  real  menace,  as  everyone 
knows  who  has  to  deal  with  securities.  How  is  the  purchaser 
to  know  the  bonds  he  buys  are  genuine?  At  the  time  of  issue 
there  is  no  particular  difficulty,  because  executing  officials  are 
identified  and  signature  certificates  provided  and  made  by 
trustworthy  bank  officials.  But  a  signature  certificate  cannot 
readily  be  made  for  each  bond  and  delivered  with  it  as  the 
bonds  are  retailed. 

The  United  States  Mortgage  and  Trust  Company  of  New 
York,  and  institutions  in  other  parts  of  the  country,  meet  this 
difficulty  by  endorsing  their  certificate  on  each  bond,  that  the 
signatures  and  seal  are  genuine.  Elaborate  precautions  to 
guard  against  forgery  are  taken  by  the  bank  mentioned,  which 
requires  that  bonds  be  printed  or  engraved  under  its  super- 

"  Dillon,  pp.  1520  to  1522. 
^/^.,  p.  1272. 
^/^.,  p.  1546. 


154  MUNICIPAL  BONDS 

vision,  on  Its  specially  prepared  water-marked  paper.  The 
utmost  care  is  exercised  to  see  that  the  officials  are  properly 
Introduced  and  Identified.  Lastly,  this  bank  must  know  that 
counsel  has  approved  the  proceedings,  before  It  permits  the 
executed  pieces  out  of  its  possession. 

In  considering  the  subject  and  the  contents  of  this  chapter, 
the  author  is  reminded  of  the  many  expedients  proposed  to 
end  the  World  War,  such  as  Henry  Ford's  peace  ship,  which 
was  to  "get  the  boys  out  of  the  trenches  by  Christmas."  All 
devices  to  make  bonds  incontestable  and  to  validate  them 
before  issue  are  to  some  degree  expedients  and  where  statutes 
require  action  to  this  end  before  Issue,  an  additional  burden 
of  compliance  with  formalities  Is  placed  upon  municipal  offi- 
cials and  examining  counsel.  Everything  considered,  no  device 
or  expedient  takes  the  place  of  adequate  statutes  and  strict 
compliance  with  the  requirements  of  the  enabling  acts. 


Chapter  XVI 
PARTICULAR  BONDS 

Bonds  classified. — It  has  been  pointed  out  that  there  is  a 
difference  between  bonds  issued  by  a  city  and  those  issued  by 
a  school  district;  in  other  words,  there  is  a  difference  between 
bonds  with  regard  to  the  issuing  political  unit.  This  dif- 
ference arises  because  the  powers  of  the  issuing  bodies  differ 
not  only  as  between  themselves,  but  as  between  classes.  There 
is  a  difference  between  bonds  considered  in  relation  to  the 
purposes  for  which  they  are  issued  and  as  to  method  of  pay- 
ment. In  the  following  pages  the  salient  features  are  pointed 
out,  of  city,  county,  and  tax  district  bonds,  of  bonds  issued 
for  various  purposes  and  of  bonds  having  different  tax  means 
of  payment.  Much  will  be  a  summary  of  principles,  and 
much  that  is  said  depends  upon  the  application  of  general 
principles. 

City  bonds. — Cities  have,  by  virtue  of  their  charters,  more 
or  less  complete  self-governmental  power,  according  to  their 
size,  geographical  location,  and  commercial  importance.  The 
city  is  expected  to  have  full  and  complete  powers  of  taxation 
and  it  also  has  incidental  powers,  such  as  the  power  to  borrow 
money  in  anticipation  of  its  revenue.  It  is  because  of  this 
that  bonds  of  a  city  are  relatively  better  supported  than  are 
bonds  of  the  minor  political  subdivisions.  To  a  lesser  extent 
this  is  true  of  towns,  villages,  and  boroughs.  A  city  is,  and 
must  be,  a  going  concern  and  should  always  maintain  its 
credit,  In  order  that  it  may  borrow  in  anticipation  of  taxes  to 
pay  running  expenses  and  to  meet  emergencies.  Cities  have 
large  general  powers  to  raise  money,  have  funds  on  hand 
available  to  pay  the  interest  on,  and  maturing  principal  of, 
their  obligations,  and  then  are  more  businesslike  in  making 
provision  for  maturing  debts,  than  less  highly  organized  po- 
litical subdivisions. 

County  bonds. — Considered  from  the  angle  of  the  Issuing 
political  unit,  county  bonds  must  be  separately  classified,  as 
pointed  out  in  Chapter  III.     Counties  are  In  a  class  by  them- 

155 


156  MUNICIPAL  BONDS 

selves,  being  major  political  subdivisions  of  the  State,  with 
many  municipality  powers,  but  not  true  municipal  corpora- 
tions. There  is  no  difference  in  the  eyes  of  the  law,  between 
bonds  of  a  county  and  a  city,  but  there  is  a  very  practical 
difference,  for  the  reason  that  the  purposes  for  which  coun- 
ties may  issue  bonds  are  relatively  few  in  number  and  the 
total  amount  of  bonds  Issued  is  small  in  proportion  to  the 
total  assessed  valuation  of  taxable  property  in  the   county. 

In  many  States,  county  taxes  are  more  certain  of  payment 
than  taxes  of  a  city  or  town,  because  of  the  plan  of  collection. 
Thus,  the  county  taxing  or  budget-raising  body  determines  the 
amount  of  the  annual  county  budget,  apportions  the  amount 
among  the  included  municipalities,  and  other  taxing  units, 
and  notifies  them  of  the  respective  amounts  to  be  raised. 
The  various  municipalities  must  find  the  money  and  pay  their 
share  into  the  county  treasury,  even  though  they  are  obliged 
to  borrow  for  the  purpose  before  the  taxes  are  collected. 

It  will  be  remembered  that  the  county  debt  statement  is 
misleading  and  for  the  purposes  of  comparison  of  debt  be- 
tween counties,  the  debts  of  included  subdivisions,  such  as 
cities,  towns  and  villages  should  be  considered.  Another  fac- 
tor which  we  rarely  take  into  account  is  contingent  liability 
for  the  debts  of  included  subdivisions.  A  county  may  pledge 
its  credit  on  behalf  of  a  tax  district.  Even  though  the  prop- 
erty in  the  tax  district  is  primarily  liable  to  a  tax  for  the  pay- 
ment of  the  bonds,  a  secondary  liability  arises  if  there  is  a 
default,  which  is  no  less  real,   although  difficult  to  enforce. 

Bonds  of  minor  municipalities. — The  names,  village,  bor- 
ough, town,  and  township,  suggest  minor  political  units,  having 
less  complete  powers  of  government  than  cities.  As  with 
county  bonds,  there  is  no  difference  in  contemplation  of  law 
between  the  bond  of  a  city  and  the  bond  of  a  village,  but 
nomenclature  is  important.  Many  villages  are  larger  and 
wealthier  than  some  cities,  but  the  bonds  of  a  city  may  be 
"legal  investments"  under  the  laws  of  a  State,  while  the  bonds 
of  a  village  may  not  be.  Village,  borough,  and  town  suggest 
small  populations,  rural  communities,  low  valuations  of  tax- 
able property,  and  lack  of  manufacturing  and  commerce. 

Bonds  of  tax  districts. — Familiar  illustrations  of  tax  dis- 
tricts are  irrigation,  levee,  and  drainage  districts,  and  in  some 
States,  water  and  sewer  districts.  While  bonds  of  such  dis- 
tricts are  not,  strictly  speaking,  assessment  bonds,  the  theory 


PARTICULAR  BONDS  157 

upon  which  taxes  are  levied  and  raised  is  that  the  property 
included  in  the  district  is  increased  in  value  by  the  improve- 
ment and  that  the  increase  in  value  may  be  taxed  to  pay  the 
bonds  issued  therefor.  The  scheme  of  taxation  will  be  con- 
sidered hereafter  in  the  paragraph  devoted  to  irrigation  dis- 
trict bonds. 

Tax  districts,  whether  called  irrigation,  sewer,  drainage, 
or  fire  districts,  are  created  for  one  purpose,  to  provide  one 
utility  or  pay  for  one  project.  Hence  if  the  project  fails, 
there  may  be  no  value  to  tax,  or  the  collection  of  taxes  may 
be  resisted.  There  is  usually  no  general  power  of  taxation  in 
the  board  or  body  issuing  the  bonds  and  no  collateral  or  other 
means  of  remedying  a  default.  The  district  has  no  indepen- 
dent funds  or  credit,  and  if  its  taxes  are  not  collected,  its 
bonds  may  be  and  probably  will  be  valueless. 

Purpose  of  issue. — Considered  as  to  purpose,  bonds  may 
be  divided  into  those  issued  to  provide  more  or  less  self- 
sustaining  public  utilities,  and  those  issued  to  acquire  prop- 
erty from  which  there  is  no  direct  return  to  the  municipality, 
such  as  parks  and  streets.  In  the  first  case,  the  municipality 
secures  an  income  from  the  operation  of  the  improvement  or 
utility.  In  the  second  case,  taxable  valuations  are  enhanced, 
a  decided  benefit  ensuing  from  the  completion  of  the  improve- 
ment or  acquisition  of  the  property. 

Bonds  for  necessary  public  purpose. — Water  bonds  are 
regarded  as  being  issued  for  an  absolutely  necessary  public 
purpose.  Hence  we  find  that,  by  virtue  of  constitutional  or 
statutory  provisions,  they  enjoy  the  privilege  of  being  outside 
most  debt  limits.  In  addition  to  being  supported  by  the  power 
of  direct  taxation,  a  well-managed  municipal  water  works 
system  should,  and  usually  does,  produce  enough  revenue  by 
way  of  water  rent  or  meter  charge,  to  pay  the  operating 
expenses  and  the  interest  and  principal  on  the  bonds  issued 
therefor.  As  observed  in  Chapter  VIII,  this  Is  especially 
true  of  a  system  operated  by  gravity.  If  the  water  system  is 
operated  by  pumping,  the  expense  of  operation  is  largely 
increased  and  the  resulting  revenue  may  or  may  not  be  large 
enough  to  take  care  of  debt  service.  Much  also  depends 
upon  the  municipal  bookkeeping,  which  is  not  always  as  exact 
as  corporate  bookkeeping,  for  the  reason  that  city  officials 
like  to  make  as  good  a  showing  as  possible.  Municipal 
operation    (not  municipal  ownership)    is  by  no  means  free 


158  MUNICIPAL  BONDS 

from  waste,  and  municipal  bookkeeping  does  not  always  tell 
the  true  story,  for  obsolescence  and  wear  and  tear,  as  well 
as  other  items,  may  not  be  shown  and  provided  for. 

In  computing  indebtedness  for  various  purposes,  water 
bonds  are  ordinarily  deductible  because,  the  income  being  suf- 
ficient to  take  care  of  debt  service,  there  is  no  direct  tax 
burden  upon  taxable  property.  These  principles  apply  to  a 
greater  or  less  extent  to  all  public  utility  issues  where  there 
is  a  direct  income  derived  from  the  utility.  Among  other 
bonds  of  this  kind  may  be  mentioned  those  issued  to  acquire 
markets,  wharves,  docks,  and  electric  lighting  and  power  sys- 
tems. Public  utility  bonds  of  other  kinds  may  or  may  not 
be  regarded  as  self-liquidating  and  hence  as  having  an  addi- 
tional factor  of  safety. 

Sewer  systems  are  sometimes  made  to  produce  a  direct 
operating  income.  This  is  very  unusual  and  wherever  it  is 
observed,  it  is  probable  that  the  charge  is  made  for  the  pur- 
pose of  avoiding  a  direct  tax  and  thus  keeping  the  bonds  out 
of  the  gross  indebtedness. 

Bonds  to  provide  properties  and  improvements. — Bonds 
to  provide  properties  and  improvements  which  produce  no 
direct  revenue  are  those  issued  to  purchase  parks  and  improve 
streets.  Such  improvements  and  many  others  do,  however, 
indirectly  increase  the  municipal  revenues  because  they  en- 
hance taxable  valuations.  For  example,  a  house  and  lot, 
assessed  at  a  valuation  of  $10,000  produces  an  annual  tax 
return  of  $250  if  the  rate  is  $25  a  thousand.  The  construc- 
tion of  a  well-paved  street,  or  a  sewer  may  increase  the  value 
of  the  property  to  $15,000,  in  which  case  the  tax  return  at 
the  same  rate  Is  $375  or  an  Increase  of  $125  a  year.  Such 
an  Income  economists  call  service  income. 

School  district  bonds  have  a  great  sentimental  value  In 
this  country,  where  education  is  regarded  as  of  primary  im- 
portance. A  school  district  will  not  willingly  default,  for  the 
educational  needs  of  a  growing  population  must  be  met. 
Local  pride  Is  not  quite  the  same  as  good  faith,  but  Is  a  fair 
substitute  for  it. 

Irrigation,  drainage  and  levee  district  bonds  are  issued  to 
provide  funds  for  a  particular  public  improvement  which,  If 
successful,  enhances  the  taxable  valuation  of  the  benefited 
property  to  such  an  extent  that  taxation  for  debt  service  may 
be  lessened,  and  certainly  the  increase.  If  any,  should  not  be 


PARTICULAR  BONDS  159 

an  appreciable  burden.  If  the  improvement  is  a  failure,  there 
is,  in  many  cases,  not  a  sufficient  increase  in  taxable  valuations 
of  property  to  permit  the  levy  of  taxes  large  enough  to  pro- 
vide interest  and  principal.  The  theory  of  taxation  under 
most  statutes  governing  the  issue  of  bonds  of  this  class,  is 
that  the  improvement,  when  completed,  will  increase  the  tax- 
able valuation  of  the  real  property  included  in  the  district 
and  that  this  increase  may  be  taxed.  This  increase,  for  the 
purpose  of  illustration,  may  be  from  $250,000  to  $1,000,000, 
or  an  increase  of  $750,000.  If  the  annual  charge  for  main- 
tenance of  the  project  and  for  debt  service  is  $5,000,  the 
annual  tax  is  6  2/3  per  cent  of  the  increase  in  value.  Hence 
if  a  farm  valued  at  $5,000  Is  increased  in  value  to  the  extent 
of  $2,500,  the  additional  tax  will  be  $16.35. 

Means  of  payment. — Classified  as  to  means  of  payment, 
we  have  on  the  one  hand  the  direct  obligations  of  the  munici- 
pality, payable  from  the  proceeds  of  a  general  ad  valorem 
tax  on  real  property,  and  assessment  bonds  on  the  other.  For 
a  discussion  of  assessment  bonds,  the  reader  is  referred  to 
Chapter  VIII.  An  additional  factor  to  be  noted  is  uncer- 
tainty of  collection  of  assessments  because  of  lack  of  clearness 
in  the  statute  authorizing  the  levy  of  the  assessment.  An- 
other factor  of  uncertainty  arises  from  the  difficulty  existing 
under  the  constitutions  and  statutes  of  many  States,  of  prov- 
ing that  the  property  has  in  fact  been  benefited  to  the  extent 
claimed.  Again,  if  the  project  is  a  failure,  or  only  partially 
successful,  owners  of  property  alleged  to  be  benefited  fre- 
quently make  determined  efforts  to  avoid  the  payment  of  the 
assessment  and  such  efforts  are  in  many  cases  successful. 
Prolonged  and  expensive  litigation  not  infrequently  follows 
the  issue  of  assessment  bonds.  In  the  eastern  States  assess- 
ment bonds  are  usually  the  direct  obligation  of  the  issuing 
cities  and  stand  on  no  different  footing  from  any  other  bonds 
as  between  the  city  and  the  bondholder.  As  between  the  city 
and  the  property  owner,  the  latter  must  pay,  but  the  bond- 
holder need  not  look  directly  to  the  property  owner. 

Assessment  bonds  may  not  be  negotiable  instruments,  be- 
cause payable  from  a  special  fund  and  hence  are  not,  for 
reasons  heretofore  given,  to  be  regarded  as  highly  as  bonds 
which  are  negotiable  instruments  in  fact. 

Electoral  bonds. — Electoral  bonds  are  only  important  as 
evidencing  popular  assent  to  the  issue.     No  consideration  has 


160  MUNICIPAL  BONDS 

been  given  in  this  book  to  municipal  elections,  although  in 
many  jurisdictions,  bonds  cannot  be  issued  except  after  an 
election  has  been  called  and  held,  and  a  majority  of  the  voters 
have  expressed  their  consent.  The  author  regards  elections 
on  bond  issues  as  being  really  limitations  on  the  power  to  issue 
and  as  such  only  justifying  consideration  in  particular  cases 
and  not  justifying  extended  discussion  in  a  book  devoted  to 
statements  of  general  principles.  As  a  matter  of  fact,  the 
municipal  taxpayers'  election  is  an  extremely  clumsy  expedi- 
ent, intended,  it  is  true,  to  secure  an  expression  of  popular 
opinion,  but  operating  as  a  limitation  of  power  upon  duly 
constituted  public  officials.  The  most  that  can  be  said  of 
elections  on  bond  issues  is  that  they  show  the  attitude  of  the 
mind  of  the  taxpayer  at  the  time  of  the  election,  and  hence  it 
may  be  said  that  electoral  bonds  indicate  popular  assent. 


Chapter  XVII 
THE  ATTORNEYS'  FUNCTIONS 

Law  defined. — Charles  Dickens,  in  what  is  probably  the 
greatest  novel  in  the  English  language,  and  certainly  the 
greatest  legal  novel,  says  that  the  great  business  of  the  law 
is  to  make  business  for  itself,  and  that  when  viewed  thus,  it 
is  a  consistent  scheme  and  not  the  mere  tangle  that  the  laity 
are  apt  to  think  it.  When  Dickens  wrote  at  white  heat,  de- 
nouncing abuses,  as  he  did  in  his  greater  novels,  he  was  not 
always  considerate  of  other  people's  susceptibilities,  and  not 
always  just. 

Law  is  in  reality  nothing  but  rules  of  human  conduct 
applied  to  the  game  which  we  call  life.  While  it  is  true  that 
lawyers  make  the  rules  we  call  law  and  apply  them  in  'prac- 
tice, it  must  nevertheless  be  remembered  that  it  is  the  frailty 
of  the  human  conscience  and  the  human  understanding  which 
has  made  rules  necessary.  It  has  been  well  said  by  Pollock 
that  the  genius  of  English  law  is  to  make  self-help  unneces- 
sary. In  other  words,  law  aims  to  throw  disputes  into  the 
courts  for  an  orderly  settlement.  But  it  should  be  borne  in 
mind  that  the  best  work  of  lawyers  is  done  outside  of  the 
courts,  and  that  this  work  is  the  most  valuable  to  the  client. 

Application  of  law  to  municipal  financing. — Municipal 
financing,  or  rather  municipal  borrowing  for  capital  expendi- 
tures, is  of  comparatively  recent  origin.  In  this  country  it 
may  be  said  to  date  from  the  days  of  expansion  and  recon- 
struction following  the  war  between  the  States.  It  has  taken 
some  time  and  a  great  deal  of  experience  to  produce  fair  and 
equitable  rules  by  which  the  game  may  be  played.  While  we 
cannot  say  that  these  rules  are  settled,  they  are  at  least  in 
process  of  becoming  definite.  Until  rules  governing  the  issue 
of  municipal  securities  become  firmly  established  and  well 
understood,  the  intervention  of  the  lawyer,  expert  in  the  sub- 
ject, will  probably  be  necessary. 

In  view  of  the  fact  that  municipalities  can  be  sued  and 
their  contracts  are  enforceable  in  the  courts,  it  is  very  neces- 

161 


162  MUNICIPAL  BONDS 

sary  to  know  the  legal  provisions  under  which  municipal  and 
other  civil  loans  are  issued,  if  investments  in  the  securities  are 
to  be  safe.  To  be  valid  obligations,  the  loans  must  be  issued 
in  accordance  with  these  provisions,  which  may  be  contained  in 
State  constitutions,  general  statutes,  or  in  municipal  and  local 
ordinances  applying  directly  to  the  loan.  Certain  attorneys 
specialize  in  furnishing  opinions  on  the  legality  of  municipal 
bond  issues,  and  no  Issue  should  be  placed  on  the  market  with- 
out procuring  a  reliable  opinion  as  to  its  validity.  The  pur- 
chaser of  bonds  should  be  assured  by  competent  and  reliable 
authority  that  the  legal  provisions  relating  to  an  issue  of 
municipal  bonds  have  been  fully  complied  with. 

Questions  of  legality. — Questions  of  legality  may  be  prop- 
erly classified  as,  first:  questions  as  to  the  power  to  issue  and 
to  pay  the  bonds,  and  second:  questions  as  to  procedure. 

Power  to  issue  and  to  pay  bonds. — The  existence  of  the 
power  to  issue  the  bonds  and  to  levy  taxes  for  their  payment 
must  be  determined  as  a  matter  of  law  before  issue,  for 
estoppel  and  the  protection  afforded  the  innocent  holders  of 
negotiable  paper  are  of  no  avail  if  these  powers  are  lacking.  If 
the  bonds  are  infirm  in  these  respects  at  the  time  of  issue,  they 
continue  to  be  infirm,  except  as  legislatures  may  afford  relief. 

Questions  as  to  procedure. — In  the  second  classification, 
we  find  Infirmities  of  procedure,  such  as  the  irregular  adop- 
tion or  publication  of  the  ordinances  authorizing  the  bonds, 
or  failure  strictly  to  comply  with  statutes  requiring  par  sale 
after  public  notice.  Generally  speaking,  such  defects  become 
de  miniinus  as  soon  as  the  bonds  reach  the  hands  of  a  holder 
for  value  without  notice.  Irregularities  of  procedure  may 
afford  ground  for  a  taxpayer's  suit  to  restrain  the  issue,  and 
for  this  reason  may  be  troublesome.  And  it  Is  always  difficult 
to  establish  when,  as  a  matter  of  law,  the  bonds  have  reached 
the  haven  where  they  are  safe  from  attack. 

Bondholders  protected  by  U.  S.  Supreme  Court. — "In  mu- 
nicipal bond  cases,  the  Supreme  Court  of  the  United  States 
has  rejected,  when  necessary  to  protect  the  botia  fide  holders 
of  such  securities,  narrow  and  rigid  constructions  of  statutes 
and  charters  authorizing  the  creation  of  such  debts.  Against 
such  holders,  it  has  given  no  favour  to  defenses  based  upon 
mere  irregularities  in  the  Issue  of  the  bonds  or  upon  non- 
compliance with  preliminary  requirements,  not  going  to  the 


THE  ATTORNEYS'  FUNCTIONS  163 

question  of  statutory  power  to  issue  them.  It  has  held  that 
the  Circuit  Courts  of  the  United  States  were  clothed  with 
full  authority,  by  mandamus  or  otherwise,  to  enforce  the  col- 
lection of  judgments  rendered  therein  on  such  bonds,  and  that 
this  authority  could  not  be  interfered  with  to  the  injury  of 
the  creditor,  either  by  the  legislature  or  the  judiciary  of  the 
States.  It  has  upheld  and  protected  the  rights  of  such  credi- 
tors with  a  firm  hand,  asserting  the  jurisdiction  and  authority 
of  the  Federal  courts  with  such  striking  energy  and  vigour  as 
apparently,  but  not  actually,  to  trench  upon  the  lawful  rights 
of  the  States  and  the  acknowledged  powers  of  the  State  tri- 
bunals. Upon  the  whole,  however,  there  is  little  doubt  that 
its  course  has  had  the  approval  of  the  profession  In  general 
and  of  the  public,  and  the  result  ought  to  teach  municipalities 
the  lesson  that  if,  having  the  power  conferred  upon  them, 
they  issue  negotiable  securities,  they  cannot  escape  payment  if 
these  find  their  way  into  the  hands  of  innocent  purchasers. 
The  result,  moreover,  has  been  of  incalculable  value  to  mu- 
nicipalities In  general  by  establishing  upon  a  firm  foundation 
the  credit  of  their  securities  issued  for  needed  permanent 
improvements,  enabling  them  thereby  to  obtain  money  for 
these  purposes  on  a  lower  interest  basis  than  would  otherwise 
have  been  possible.  And  for  this  the  country  at  large  is  under 
lasting  obligations  to  the  wisdom,  courage,  foresight  and 
sense  of  justice  of  the  Supreme  Court  of  the  United  States."  ^ 

Questions  as  to  legality. — As  most  questions  in  regard  to 
legality,  which  are  serious,  are  questions  of  power,  it  has 
become  usual  for  municipalities  to  retain  expert  counsel  be- 
fore any  proceedings  are  started.  The  facts  are  submitted 
and  questions  of  power  determined,  and  problems  of  proce- 
dure resolved.  The  specialist  will  prepare  the  ordinance  and 
necessary  resolutions,  and  will  advise  the  municipality  as  to 
the  procedure  to  be  followed,  and  when  the  bonds  are  to  be 
sold,  the  notice  of  sale  will  usually  state  that  an  opinion  of 
counsel  will  be  furnished  without  cost  to  the  successful  bidder. 
This  plan  ordinarily  results  in  the  purchaser  being  able  to 
obtain  the  bonds  within  a  very  few  days  after  the  award,  and 
before  market  conditions  have  materially  changed. 

In  commenting  upon  litigation  between  a  western  county 
and  a  well-known  investment  banking  house,  in  which  case  the 

'Dillon,  p.  1402. 


164  MUNICIPAL  BONDS 

purchaser's  attorneys  declined  to  approve  the  legality  of  the 
bonds,  and  the  purchaser  was  sustained  by  the  courts,  the 
editor  of  the  Bond  Buyer  has  recently  said: 

"Every  one  of  these  cases  is  a  powerful  argument  in  favor 
of  approval  of  bonds  by  recognized  bond  attorneys  in  advance 
of  the  original  sale.  The  municipality  which  does  not  offer 
the  purchaser  of  its  bonds  the  approving  opinion  of  a  recog- 
nized bond  attorney  is  taking  an  entirely  unnecessary  risk  of 
being  seriously  delayed  with  its  public  improvements,  or 
worse,  financially  embarrassed  if  its  loan  happened  to  be  for 
the  purpose  of  meeting  a  maturing  obligation, 

"It  has  been  conceded  long  ago  by  many  large  munici- 
palities that  the  cost  of  the  attorney's  opinion  is  recovered  in 
the  enhanced  price  the  bonds  will  bring  over  the  price  the 
dealer  will  bid  for  bonds  not  approved  in  advance,  since  the 
delay  incident  to  having  the  legality  investigated  is,  at  least, 
equally  as  disadvantageous  to  the  buyer  as  it  is  to  the  seller." 

When  the  purchaser  retains  counsel. — In  cases  where  the 
municipality  does  not  retain  counsel,  the  purchaser  must,  of 
course,  do  so.  The  bid  should  be  conditioned  upon  the  fur- 
nishing to  the  purchaser  of  a  record  of  proceedings,  showing 
that  the  bonds  have  been  regularly  issued  to  the  satisfaction 
of  the  purchaser's  attorneys.  This  course  entails  delay. 
Counsel  must  be  advised  of  the  nature  of  the  issue,  make  a 
preliminary  statutory  search,  then  write  a  letter  calling  for 
papers,  examine  them  and  probably  be  obliged  to  make  addi- 
tional requests  for  information.  It  is  obvious  that  this  course 
must  inevitably  result  in  delay,  and  that  the  market  may  fall 
between  the  time  of  award  and  the  time  the  opinion  is  forth- 
coming. If  counsel  fails  to  approve  the  issue,  the  bond  house 
must  pay  its  lawyers  and  charge  off  the  fee  to  its  lost-bond 
account.  The  municipality  is  quite  apt  to  charge  the  pur- 
chaser with  bad  faith,  and  to  intimate  that  counsel  have 
allowed  themselves  to  be  influenced  by  market  conditions  or 
their  clients'  desires.  This  is  never  so  with  reputable  attor- 
neys, but  it  is  very  difficult  to  substantiate  such  a  denial.  The 
courts  have,  however,  said  in  several  cases  and  we  may  regard 
it  as  settled  law,  that  in  the  absence  of  a  showing  of  bad  faith 
or  gross  negligence,  a  bond  house  will  not  be  compelled  to 
take  securities  which  are  not  legal  in  the  opinion  of  its  coun- 
sel, provided  the  bid  contains  the  proper  condition,  that  is, 


THE  ATTORNEYS'  FUNCTIONS  165 

that  the  legality  be  evidenced  satisfactorily  to  the  purchaser's 
counsel. 

The  record  of  proceedings. — A  record  of  proceedings  must 
be  obtained  in  order  to  enable  counsel  to  form  an  opinion  as 
to  legality.  This  record  consists  of  a  large  number  of  papers 
intended  to  show  who  are  the  city's  officers,  the  proceedings 
taken  to  issue  the  bonds,  and  the  certificates  necessary  when 
the  transaction  is  completed.  It  is  much  easier  to  obtain  a 
proper  record  before  sale  than  after  it;  there  is  more  time 
and  there  has  been  less  opportunity  for  bad  blood  to  develop. 
Quite  frequently  counsel  aslcs  for  papers,  the  relevancy  of 
which  is  not  apparent  to  the  municipal  official  who  must  pre- 
pare them,  but  as  an  attorney  engaged  in  this  class  of  prac- 
tice once  said,  "If  I  asic  for  the  picture  of  the  city  clerk's 
mother-in-law,  I  want  It  and  I  do  not  want  any  request  for  an 
explanation."  The  point  Is,  that  counsel  must  form  an  opin- 
ion and  express  it  in  writing.  He  must  have  facts  before  him 
on  which  to  predicate  an  opinion  and  different  attorneys  in- 
variably differ  as  to  the  proper  contents  of  a  record. 

At  the  end  of  this  chapter  is  a  copy  of  a  "Record  Memo- 
randum" showing  the  papers  necessary  to  form  a  record  of 
proceedings  in  regard  to  a  typical  bond  Issue.  Following  that 
is  a  "Memorandum  for  Examination  of  Municipal  Bonds," 
which  shows  the  nature  of  many  of  the  questions  which  must 
be  disposed'of  by  the  skilled  specialist. 

The  opinion. — It  Is  becoming  the  practice  for  counsel  to 
give  two  opinions,  one  called  preliminary  and  the  other  final. 

The  preliminary  opinion  means  that  all  essential  papers 
have  been  passed  upon,  and  that  when  certain  additional  steps 
are  taken,  an  unqualified  approving  opinion  may  be  forthcom- 
ing.    It  concludes  as  follows : 

Said  bonds  may  be  taken  up  and  paid  for  and  we  will  give  our  final  ap- 
proving opinion  when  we  have  examined  a  form  of  said  bond  and  are  fur- 
nished  with   formal    proof   that, 

(a)  the  signatures  upon  said  bonds  are  genuine, 

(b)  said  bonds  are  taken  up  and  paid  for  in  accordance  with  the  contract 
of  sale. 

Yours  very  truly. 


The  final  opinion  is  similar  in  form  to  the  preliminary 
opinion,  except  that  the  bonds  are  described  "as"  instead  of 


166  MUNICIPAL  BONDS 

"to  be"  issued,  "are"  instead  of  "will  be"  binding  obligations, 
and  is  as  follows : 


February  8,  1922. 

Hon.  William  J.  Wallin, 

Mayor  of  the  City  of  Yonkers, 
Yonkers, 

New  York. 

Dear  Sir: — 

We  have  examined  a  record  of  proceedings  relating  to  nine  issues  aggre- 
gating $2,312,000  of  coupon  bonds  of  the  City  of  Yonkers,  a  municipal  cor- 
poration of  the  State  of  New  York,  dated  January  1,  1921,  exchangeable  at  the 
option  of  the  holder  for  bonds  registered  as  to  both  principal  and  interest  as 
follows: 

$25,000  Department  of  Public  Works  Equipment  Bonds,  numbered  from 
1  to  25  inclusive,  maturing  $5000  on  January  1  in  each  of  the  years  1922  to 
1926  inclusive; 

$300,000  Assessment  Bonds,  numbered  from  26  to  326  inclusive,  maturing 
$50,000  on  January  1  in  each  of  the  years  1922  to  1927  inclusive; 

$14,000  Public  Building  Bonds,  numbered  from  326  to  339  inclusive,  ma- 
turing $1000  on  January  1  in  each  of  the  years  1922  to  1935  inclusive; 

$60,000  City  Hall  Bonds,  numbered  from  340  to  399  inclusive,  maturing 
$3000  on  January  1  in  each  of  the  years  1922  to  1941  inclusive; 

$1,070,000  Local  Improvement  Bonds,  numbered  from  400  to  1479  inclusive, 
maturing  $53,500  on  January  1  in  each  of  the  years  1922  to  1941   inclusive; 

$154,000  Dock  Bonds,  numbered  from  1480  to  1639  inclusive,  maturing 
$7700  on  January  1   in  each  of  the  years  1922  to  1941   inclusive; 

$460,000  School  Bonds,  numbered  from  1640  to  2099  inclusive,  maturing 
$23,000  on  January  1  in  each  of  the  years  1922  to  1941  inclusive; 

$149,000  Grade  Crossing  Elimination  Bonds,  numbered  from  2100  to  2259 
inclusive,  maturing  $7450  on  January  1  in  each  of  the  years  1922  to  1941 
inclusive; 

$80,000  Water  Bonds,  numbered  from  2260  to  2339  inclusive,  maturing 
$2000  on  January  1  in  each  of  the  years  1922  to  1961  inclusive; 

All  of  said  bonds  bearing  interest  at  the  rate  of  five  and  one-half  per 
centum  (5j/2%)  per  annum,  payable  semi-annually  on  April  1  and  October  1  in 
each  year  and  at  maturity,  issued  pursuant  to  the  Second  Class  Cities  Law 
and  Chapter  452  of  the  Laws  of  1908  as  amended,  and  in  the  case  of  the  Grade 
Crossing  Elimination  Bonds  pursuant  to  the  Railroad  Law,  and  in  the  case  of 
the  School  Bonds  pursuant  to  the  Education  Law  of  the  State  of  New  York, 
and  pursuant  to  ordinances  of  the  City  of  Yonkers,  approved  December  29, 
1920,  and  in  our  opinion  said  bonds  are  binding  and  legal  obligations  of  the 
said  City. 

We  have  examined  bonds  No.  1,  26,  326,  340,  400,  1480,  1640,  2100  and 
2260  of  said  issues  and  in  our  opinion  the  forms  of  said  bonds  and  their 
execution  are  regular  and  proper. 

Yours  very  truly, 


THE  ATTORNEYS'  FUNCTIONS  167 

Such  an  opinion  means  just  what  it  says,  namely,  that  the 
bonds  are  binding  and  legal  obligations  of  the  municipality. 
Legal  or  legality  means  something  more  than  the  mere  for- 
mality of  issue;  it  means  the  expression  of  a  perfect  obliga- 
tion; it  means  that  the  security  of  the  obligation  and  the 
means  of  payment  are  such  that  the  buyer  need  have  no  con- 
cern about  his  income  and  Investment.  Among  other  things, 
it  means  that  the  power  to  issue  the  bonds  exists,  that  they 
are  within  every  statutory  and  constitutional  limitation  of 
indebtedness,  that  every  step  required  to  be  taken  has  been 
taken  in  due  time,  form  and  manner,  and  that  sufficient  tax 
may  be  levied  to  provide  funds  to  pay  the  bonds. 

Qualified  opinions. — It  is  occasionally  necessary  to  give 
qualified  opinions.  This  necessity  arises  because  there  is  a 
limitation  upon  the  taxing  power,  and  sometimes  because 
there  has  been  a  failure  of  procedure.  A  characteristic  quali- 
fication where  there  is  a  limited  tax  is  the  following: 

In  addition  to  the  tax  of  I/2  of  1  per  cent  for  general  purposes,  the  city  is 
authorized  to  levy  an  additional  tax  not  exceeding  j^  of  1  per  cent  per  annum 
upon  the  value  of  the  taxable  property  therein  to  be  devoted  to  the  payment  of 
its  public  debt  and  the  interest  thereon  and  to  the  maintenancetof  its  public 
schools  and  public  conveniences. 

A  limitation  expressing  a  failure  fully  to  comply  with  the 
statutory  requirements  is  contained  in  the  latter  part  of  an 
opinion: 

Notwithstanding  that  the  right  to  attack  the  validity  of  said  bonds  has 
not  been  cut  off,  as  provided  by  the  statutes  of  New  Jersey,  the  said  bonds  are 
in  our  opinion  binding  and  legal  obligations  of  said  Township. 

As  an  example  of  an  opinion  intended  clearly  to  express 
the  true  character  of  the  bonds,  the  following  is  of  interest: 

In  our  opinion,  said  bonds  will  be  binding  and  legal  obligations  of  the 
Town  of  Mamaroneck,  payable  in  the  first  instance  from  assessments  and  not 
from  a  general  town  tax,  which,  however,  can  be  levied  if  there  is  a  shortage 
in  the  primary  fund. 

When  a  qualified  opinion  is  merchantable. — It  is  quite  un- 
usual for  a  qualified  opinion  to  be  merchantable,  though  occa- 
sionally such  an  opinion  may  be  used.  The  investment  bank- 
ing houses  require  unqualified  opinions. 

Whether  an  opinion  is  merchantable  or  not  depends 
largely  upon  whose  opinion  it  is;  the  attorney  must  be  gen- 


168  MUNICIPAL  BONDS 

erally  recognized  as  a  specialist  and  expert  before  his  opinion 
will  pass  current.  It  is,  of  course,  true  that  opinions  of  cer- 
tain attorneys  are  merchantable  in  some  parts  of  the  county 
and  not  so  in  others,  and  some  attorneys  will  approve  certain 
classes  of  securities  which  others  will  not  approve.  An  opin- 
ion by  counsel  whose  name  is  well-known  presumably  makes 
it  easier  for  the  purchaser  to  sell  the  bonds  and  the  sophis- 
ticated purchaser  demands  such  an  opinion. 

"One  of  the  strongest  influences  making  for  the  present 
admirable  credit  of  American  municipalities  has  been  the 
scrupulous  care  with  which  all  questions  affecting  legality 
have  been  considered.  To  attempt  an  estimate  of  the  pro- 
portion of  all  loans  that  have  been  put  out  with  sufficient 
irregularity  to  cause  correction  by  attorneys  before  acceptance, 
would  occasion  unnecessary  alarm.  The  bond  attorney  stands 
between  the  taxpayer  and  the  investor,  protecting  each  against 
the  other,  and  working  in  the  interest  of  both  for  a  still  higher 
development  of  municipal  bond  law  and  bond  practice.  His 
work  is  now  so  well  done,  and  so  systematically,  that  we 
rightly  take  it  as  a  matter  of  course,  and  give  ourselves,  as 
individual  buyers,  in  dealing  with  bond  issues  of  recent  years, 
to  other  considerations  than  those  connected  with  validity."  ^ 

'  Chamberlain,  p.  234. 


THE  ATTORNEYS'  FUNCTIONS  169 

Form  of  Record  Memorandum 
NEW  JERSEY  PERMANENT  SERIAL  BONDS 

(FOR  OTHER  THAN  SCHOOL  PURPOSES) 

RECORD   MEMORANDUM 

Prepared  for  the  assistance  of  dients  by 

HAWKINS,  DELAFIELD  &  LONGFELLOW, 

Attorneys  at  Law, 

20  Exchange   Place, 

New  York  City, 

March  1,  192L 

This  memorandum  is  intended  to  be  helpful  in  the  preparation  of  a  rec- 
ord of  proceedings  upon  which  an  opinion  approving  bonds  can  be  based. 
The  proof  referred  to  is  not  necessarily  complete,  and  it  should  be  under- 
stood that  it  is  generally  necessary  after  examining  such  proof  to  ask  for 
additional  papers. 

As  a  preliminary  matter  and  for  the  purpose  of  determining  the  maturities 
of  the  bonds  and  the  character  of  the  ordinance  to  authorize  them,  the  follow- 
ing information  should  be  furnished,  and,  if  the  bonds  are  for  several  pur- 
poses, this  information  should  be  put  in  tabular  form: 

(a)  A  description  of  each  improvement  made  or  property  acquired,  that  is, 
its  kind  and  location,  which  description  should  be  sufficiently  definite  to  enable 
its  classification  to  be  determined  within  the  definition  of  the  Pierson  Bond  Act. 
{Sec.  4,  {2)  as  amended  1917,  Chap.  240,  p.804.) 

(b)  The  date  when  the  improvement  was  completed  or  the  property  ac- 
quired.    {Pierson  Bond  Act,  Sec.  4   {j),  as  amended  igij,  Chap.  240,  p.  806.) 

{c)  The  amount  of  the  cost  to  be  paid  by  the  municipality  at  large. 

{d)  The  date  the  last  installment  of  the  assessment  is  payable.  {Pierson 
Bond  Act,  Sec.  2  {/)    {a),  as  amended  1917,  Chap.  240,  p.  804.) 

{e)  The  amount  of  uncollected   assessments. 

(/)    The  total  cost  of  the  improvement. 

{g)   Amount  of  temporary  notes  or   bonds  outstanding. 

If  there  are  no  assessment  improvements  involved,  items  {c),  {d)  and  {e) 
should  be  omitted. 

The  following  are  the  papers  to  be  included  in  the  record  of  proceedings: 

1.  A  certificate  by  the  Clerk  covering  the  following  matters: 

{a)  The  names  and  dates  of  election  or  appointment  and  dates  of  com- 
mencement and  end  of  the  term  of  office  of  the  members  of  the  governing  body, 
the  chief  financial  official  (stating  the  name  of  his  office),  the  Clerk,  the  Treas- 
urer, and  of-the  other  officials,  if  any,  who  will  execute  the  proposed  bonds. 

{b)  An  extract  from  the  rules  of  order  or  resolution  of  the  governing 
body  which  fixes  the  times  for  its^regular  meetings.  If  this  cannot  be  furnished, 
the  times  at  which  the  regular  meetings  are  held  should  be  stated. 

{c)  If  the  municipality  is  governed  by  the  Walsh  Act,  a  statement  that  at 
an  election  held  on  a  certain  date,  stating  the  date,  a  majority  of  the  legal 
voters  assented  to  an  Act  of  the  Legislature  of  the  State  of  New  Jersey  entitled: 
"An  act  relating  to  regulating  and  providing  for,  the  government  of  cities, 
towns,  townships,  boroughs,  villages,  and  municipalities  governed  by  board  of 


170  MUNICIPAL  BONDS 

commissioners  or  improvement  commissions  in  this  State,"  approved  April  25, 
1911,   by  the  following  vote: 

For  the  adoption   (state  vote) 
Against  the  adoption    (state  vote) 

{fValsk  Act,  Sec.  l8,  as  amended  by  P.  L.  1915,  p.  12.) 

Also  a  statement,  if  it  be  the  fact,  that  no  election  in  the  municipality  has 
been  held  on  the  question  of  whether  it  shall  abandon  its  organization  under 
the  said  act  {Walsh  Act,  Section  19  as  amended  by  P.  L.  1917,  p.  14.6)  and 
that  the  municipality  is  organized  and  acting  thereunder. 

{d)  If  the  municipality  is  not  governed  by  the  Walsh  Act  a  reference  to 
the  act  which  prescribes  its  form  of  government.  If  the  city  is  acting  under  a 
referendum  act  proof  of  its  adoption  must  be  furnished. 

{e)  A  statement  of  the  corporate  name  of  the  municipality,  and  if  it  be 
the  case,  a  statement  that  the  corporate  name  of  the  municipality  has  not  been 
changed  by  any  election  or  shortened  by  any  resolution.  If  the  corporate  name 
has  been  changed  by  an  election,  a  copy  of  the  minutes  recording  the  results 
of  the  election  should  be  set  forth.  {Act  Concerning  Municipalities,  Art.  II, 
P.  L.  IQiy,  p.  320).  If  the  corporate  nam.e  of  the  city  has  been  shortened,  a 
copy  of  the  resolution  of  the  governing  body  relating  thereto  should  be  set 
forth.      {Act  Concerning  Municipalities,  Art.  Ill,  P.  L.   1917,  p.  321.) 

(/)  A  statement  of  the  official  newspaper  or  newspapers  of  the  munici- 
pality. {Act  Concerning  Municipalities,  Art.  XXXVII,  Sec.  4,  P.  L.  1917, 
p.  456.) 

2.  If  the  corporate  name  of  the  municipality  has  been  changed  by  an 
election,  a  copy  of  the  minutes  recording  such  election  as  filed  in  the  office  of 
the  Clerk  of  the  County  certified  by  such  Clerk,  and  also  a  copy  as  filed  in  the 
office  of  the  Secretary  of  State  of  New  Jersey  certified  by  the  Secretary  of 
State.   {Act  Concerning  Municipalities,  Art.  II,  Sec.  2,  P.  L.  1917,  p.  320.) 

If  the  corporate  title  of  the  municipality  has  been  shortened,  a  copy  of  the 
resolution  shortening  the  same,  as  filed  in  the  office  of  the  Secretary  of  State 
of  New  Jersey  certified  by  the  Secretary  of  State.  {Act  Concerning  Municipali- 
ties, Art.  Ill,  P.  L.  1917,  p.  321.) 

3.  Certified  copies  of  the  ordinances  authorizing  the  improvements  for 
which  the  bonds  are  to  be  issued. 

4.  A  copy  of  the  last  annual  debt  statement  of  the  municipality  filed  in  the 
office  of  the  Clerk,  certified  by  the  Clerk  as  a  true  copy  of  the  annual  debt 
statement  filed  in  his  office  and  stating  the  date  of  filing.  {Subdiv.  i,  Sec.  12, 
Pierson  Bond  Act,  Chap.  252,  P.  L.  1916,  p.  525,  as  amended  by  Chap  108, 
P.  L.  1920,  p.  235.) 

5.  A  copy  of  the  supplemental  debt  statement  of  the  municipality,  made  in 
connection  with  this  issue  filed  in  the  office  of  the  Clerk,  certified  as  stated  in 
the  preceding  paragraph.  {Pierson  Bond  Act,  P.  L.  1916,  Chap.  252,  Sec.  12  {2), 
p.  525,  as  amended  by  Chap.  108,  P.  L.  1920,  p.  235.) 

Although  this  certificate  is  all  that  is  necessary  for  the  record  of  pro- 
ceedings, it  is  advisable  and  customary  to  prepare  and  publish  a  financial  state- 
ment showing  the  debts  of  the  municipality  in  such  form  that  purchasers  can 
tell  whether  the  bonds  are   legal  investments   for  savings  banks. 

6.  Affidavit  or  affidavits  of  the  person  or  persons  having  knowledge  of  the 
facts,  stating  the  position  held  by  such  person  and  that  as  such  he  knows  the 
facts,  and  stating  either  (a)  if  the  bonds  are  not  assessment  bonds,  character 
of  the  improvement  of  property  and  the  dates  of  completion  of  the  improve- 


THE  ATTORNEYS'  FUNCTIONS  171 

ments  and  dates  of  acquisition  of  the  properties  for  which  the  bonds  are  to  be 
issued.  (Pierson  Bond  Act,  Sec.  4  {3),  as  amended  1917,  Chap.  24.0,  p.  804), 
or  {b)  if  the  bonds  are  assessment  bonds,  the  date  when  the  last  installment  of 
assessments  will  be  payable.  {Pierson  Bond  Act,  Sec.  2  (/)  {a),  as  amended 
1917,  Chap.  240,  p.  804.)  This  is  for  the  purpose  of  determining  the  maturity 
of  the  bonds. 

7.  Extracts,  certified  by  the  Clerk,  from  the  Minutes  of  the  meetings  of 
the  governing  body,  at  which  the  said  ordinance  was  introduced  and  finally 
passed. 

8.  An  affidavit,  or  affidavits,  made  by  the  manager  or  publisher  of  the 
newspaper  or  newspapers,  in  which  the  ordinance  was  published  prior  to  final 
passage.  Each  of  these  should  state  the  place  where  the  newspaper  is  printed, 
published  and  circulated,  and  the  date  of  publication,  and  should  have  a  clip- 
ping attached  showing  the  ordinance  as  published. 

The  publication  must  be  at  least  two  days  before  final  passage.  After  the 
ordinance  should  appear  the  following: 

Notice. 

The    (state  name  of  governing  body,)    of  the    (state   name  of  munici- 
pality,)   will   consider   the   final   passage   of  the   foregoing   ordinance   at   a 
meeting  to  be  held  on  ,  19        ,  at  o'clock 

M.,  at  in  the  said   (city,  borough,  etc.). 


Clerk. 

{Act   Concerning   Municipalities,   Art.   X,  Sec.    I,   as   amended   by   P.   L.    1918, 
p.  479;  also  Chap.  188,  P.  L.  igig,  p.  418,  as  amended  by  P.  L.  192 1,  p.  854.) 

9.  An  extract,  certified  by  the  Clerk,  from  the  minutes  of  the  meeting  of 
the  governing  body  at  which  the  ordinance  authorizing  the  bonds  was  finally 
passed. 

10.  A  copy,  certified  by  the  Clerk,  of  the  ordinance  authorizing  the  bonds. 

11.  Affidavits  of  publication,  similar  to  those  described  in  paragraph  8 
showing  the  publication  of  the  ordinance  after  final  passage. 

After  the  ordinance  must  appear  the  words: 

Attest: 

Clerk. 


The  following  must  then  follow: 


Statement. 


The  foregoing  ordinance  was  adopted  on  the  day  of 

,  19        . 

The  bonds  authorized  thereby  will  be  issued  and  delivered   after  the 

day  of  ,  19         ,    (specifying 

a  day  not  less  than  twenty  days  after  the  first  publication)    and  any  suit, 

action  or  proceeding  to  set  aside  or  vacate  this  ordinance  must  be  begun 

within  twenty  days  after  the  publication  of  this  statement. 


Clerk. 


172  MUNICIPAL  BONDS 

In  the  case  of  a  borough  or  township  there  must  be  added  to  the  state- 
ment: 

"Such  bonds  will  not  be  issued  if  protests  against  the  same  are  filed 
under  Section  Nine,  Chapter  252,  P.  L.  1916,  as  amended,  unless  a  propo- 
sition for  the  issuance  thereof  shall  be  adopted  at  an  election  under  said 
section." 


Borough   {or  township)    Clerk. 
{Pierson  Bond  Act,  Sec.  2  (/)    {2),  as  amended  1917,  Chap.  24.0,  p.  805.) 

12.  A  copy,  certified  by  the  Clerk,  of  a  certificate  made  by  him  and  filed 
in  his  office  showing  that  there  has  been  no  protest  against  the  ordinance,  or, 
in  the  case  of  a  borough  or  tow^nship,  against  the  issuance  of  the  bonds,  and  no 
demand  for  a  referendum.  {Act  Concerning  Municipalities,  Art.  XXXVII, 
Sec.  24,  P.  L.  1917,  p.  461,  Walsh  Act,  Sec.  17,  as  amended  by  P.  L.  1913, 
p.  223  and  in  a  borough  or  toivnship,  Pierson  Bond  Act,  Sec.  9,  1916,  Chap. 
252,  p.  524-)  This  certificate  should  not  be  made  and  filed  until  more  than  ten 
days  after  the  publication  of  the  ordinance  after  final  passage. 

13.  An  extract,  certified  by  the  Clerk,  from  the  minutes  of  the  meeting  of 
the  governing  body  at  which  the  resolution  was  adopted  providing  for  the 
form  of  the  bonds  and  for  their  sale.  {Pierson  Bond  Act,  Sec.  6,  as  amended 
1920,  Chap.  2$2,  p.  469.)  This  resolution  may  be  adopted  at  the  time  of  the 
final  passage  of  the  ordinance  authorizing  the  bonds  or  at  any  time  thereafter, 
but  the  date  of  sale  cannot  be  within  ten  days  after  the  publication  of  the  ordi- 
nance after  final  passage. 

14.  Affidavits  of  publication,  similar  to  those  described  in  paragraph  8, 
showing  the  publication  of  the  notice  of  sale.  The  law  requires  at  least  ten 
days'  notice  of  sale  published  once  in  the  local  paper  and  once  in  a  financial 
paper  published  in  New  York  City  or  Philadelphia.  {Pierson  Bond  Act, 
Sec.  6,  as  amended  1920,  Chap.  252,  p.  469,  and  also  I9I9,  Chap.  188,  p.  418.) 

15.  An  extract,  certified  by  the  Clerk,  from  the  minutes  of  the  meeting  at 
which  the  resolution  is  adopted,  awarding  the  bonds.  The  minutes  should 
contain  a  table  of  the  bids  received. 

The  bonds  cannot  be  awarded  within  ten  days  after  the  publication  after 
final  passage  of  the  ordinance  authorizing  the  bonds,  because  such  ordinance 
does  not  until  then  become  operative.  {Act  Concerning  Municipalities,  Art. 
XXVII,  Sec.  24,  Chap.  152,  P.  L.  1917,  p.  261.) 

16.  A  certificate  of  the  municipal  attorney  that  there  is  no  litigation  pend- 
ing or  threatened  affecting  the  bonds.  This  cannot  be  made  until  after  the 
twenty-day  period  has  expired  within  which   litigation  can  be  begun. 

After  the  examination  of  a  record  of  proceedings  containing  the  proof 
above  described,  and  such  additional  proof  as  may  be  required  in  any  par- 
ticular case,  a  preliminary  opinion  is  given.  The  bonds  can  then  be  taken  up 
and  paid  for  and  a  final  opinion  will  be  given  on  further  proof,  consisting  of: 

17.  A  certificate  by  the  Treasurer  showing  the  delivery  of  the  bonds  and 
payment  for  them. 

18.  A  certificate  identifying  the  signatures  on  the  bonds  as  the  signatures 
of  the  proper  officials,  made  by  an  officer  of  a  bank;  and 

19.  An  examination  of  an  executed  bond. 


THE  ATTORNEYS'  FUNCTIONS  173 


Additional  Matters. 

20.  In  case  any  meetings  of  the  governing  body  are  special  meetings  at 
which  not  all  the  members  are  present,  the  record  should  include  proof  that 
each  absent  member  actually  received  notice  of  the  time,  place  and  object  of 
the  meeting.  Such  proof  may  be  by  affidavit  of  the  person  who  served  the 
notice  or  by  the  affidavit  of  such  absent  members  that  they  received  the  notice. 
The  form  of  notice  should  be  attached.  Proof  that  notice  was  mailed,  without 
proof  that  it  was  received,  is  not  sufficient. 

21.  All  certificates  should  be  dated  and  those  m.ade  by  the  Clerk  should 
have  the  municipal  seal  affixed. 

22.  It  is  suggested  that  extracts  from  the  minutes  of  the  governing  body 
be  certified  by  a  certificate  in  substantially  the  following  form: 


Clerk's  Certificate. 

I,  ,  Clerk  of  the    (state   name   of  mu- 

nicipality), New  Jersey,  Do  Hereby  Certify  that 

The  annexed  extract  from  the  minutes  of  a  meeting  of  the   (state  name 
of  governing  body)  of  the   (state  name  of  municipality),  held  on 

,  19  ,  has  been  compared  by  me  with  the  original 
and  it  is  a  correct  transcript  therefrom  and  of  the  whole  of  the  original  so 
far  as  the  same  relates  to  the  matters  therein  referred  to. 


This  paragraph 
is  for  use  by  a 
Walsh  Act  mu- 
nicipality only.- 
(Walsh  Act,  Sec, 
3,  P.  L.  1912,  p. 
644.) 


The  resolution  (or  ordinance)  referred  to  therein 
was  reduced  to  writing  and  read  before  the  vote  was 
taken  thereon,  and  the  vote  was  taken  by  yeas  and  nays 
and  entered  in  the  minutes  and  the  minutes  of  said 
meeting  so  recorded  were  signed  by 

being  a  majority  of  all  the  Commissioners 
and  by  the  undersigned  Clerk. 


In  Witness  Whereof,  I  have  hereunto  set  my  hand  and  affixed  the 
seal  of  said   (city,  borough,  etc.)   this  day  of 

.  19        . 


Clerk. 

23,  It  is  suggested  that  ordinances  be  certified  by  a  certificate  in  substan- 
tially the  following  form: 


Clerk's  Certificate. 

I,  ,  Clerk  of  the   (state  name  of  munici- 

pality), Do  Hereby  Certify  that 

The  annexed  copy  of  an  ordinance  finally  adopted  at  a  meeting  of 
the  (state  name  of  governing  body)  of  the  (state  name  of  municipality), 
held  on  ,  19        ,  has  been  compared  by  me  with 

the  original  and  it  is  a  correct  transcript  therefrom  and  of  the  whole  of 
the  original. 


174  MUNICIPAL  BONDS 


This  paragraph 
is  for  use  by  a 
Walsh  Act  mu- 
nicipality only. 
(Walsh  Act,  Sees. 
3  and  6,  P.  L.  1912, 
pp.  664  and  649.) 


Said  ordinance  was  introduced  at  a  meeting  of  said 
Board  held  on  ,  19        ,  and 

was  finally  adopted  on  ,  19         .     It  was 

complete  in  the  form  in  which  it  was  finally  passed  and 
remained  on  file  with  the  undersigned  clerk  for  public 
inspection  from  the  date  of  introduction,  to  the  date  of 
adoption,  being  at  least  two  weeks  before  the  final  pas- 
sage or  adoption  thereof.  Said  ordinance  was  recorded 
and  was  on  ,  19         ,  signed  in  the 

book  in  which  it  is  recorded  by  the  Commissioners  whose 
names  appear  on  the  annexed  copy,  being  a  majority  of 
all  the  Commissioners. 


In  Witness  Whereof,  I  have  hereunto  set  my  hand  and  affixed  the 
seal  of  said   (city,  borough,  etc.),  this  day  of 

,  19       . 


Clerk. 

24.  Extracts  from  minutes  should  include  the  statement  of  whether  the 
meeting  is  regular  or  special,  its  date,  the  place  where  it  is  held,  and  the  per- 
sons present  and  absent,  and  the  vote  for  and  against  each  question  and  the 
names  of  those  voting  aye  and  nay. 

25.  The  examination  of  the  record  of  proceedings  will  be  facilitated  if, 
so  far  as  possible,  papers  are  tj'pewritten  on  standard  size  legal  paper  (8x13 
inches).  Sufficient  space  should  be  left  at  the  top  for  binding.  Affidavits  of 
publication  and  other  papers  of  a  different  size  should  be  attached  to  standard 
size  paper. 

26.  Papers  referred  to  in  separate  numbered  paragraphs  of  this  memo- 
randum should  not  be  combined  or  bound  together,  in  order  that  they  may  be 
arranged  in  the  most  convenient  order. 


Memorandum  for  Examination  of  Municipal  Bonds 

A. 
CONSTITUTIONALITY  OF  ENABLING  ACT. 

1.  Does  title  express  subject  of  act. 

2.  Does  act  embrace  more  than  one  subject,  if  that  is  prohibited. 

3.  Is  it  special  legislation,  if  prohibited. 

4.  Does  it  unconstitutionally  delegate   legislative   power. 

5.  Is  it  repugnant  to  other  constitutional  provisions. 

6.  *Was  it  adopted  and  approved  as  required  by  the  constitution. 

a.  Introduction  and  separate  readings. 

b.  Amendments  during  passage. 

c.  Ayes  and  nays — Required  number  voting. 

d.  Approval  by  Executive. 

e.  Acceptance  by  municipality. 

f.  If  act  special  or  local,  was  notice  of  application  given^  if  required. 


THE  ATTORNEYS'  FUNCTIONS  175 

Note:  *(A)  In  some  states  it  is  necessary  to  get  proof  of  proper  passage  and 
approval.  In  other  states,  regularity  of  passage  and  approval  is  con- 
clusively presumed  by  official   promulgation. 

(B)  If  statute  is  contained  in  legislative  revision,  it  may  be  relied 
upon;  but  if  in  mere  codification  or  compilation,  original  session  laws  must 
be  examined. 

B. 

DEBT  LIMITATIONS. 

7.  Are  there  any  constitutional  or  general  statutory  limitations  of  indebted- 
ness; if  so,  has  the  margin  of  debt-incurring  capacity  been  exceeded. 

a.  Total  debt,  including  this  issue. 

b.  Deductions  which  may  be  made  to  ascertain  net  debt. 

c.  If  necessary,  include  debt  of  other  municipalities  covering  in  whole 
or  in  part  same  territory. 

d.  What  is  assessed  valuation,  or  population,  or  other  facts  upon  which 
limitations  depend. 

Note:  In  New  York  see  that  assessed  valuation  of  cities  is  as  equalized  by 
County  Board. 

C. 

INCORPORATION. 

8.  Is  municipality  duly  incorporated. 

a.  By  special  act. 

b.  By  proceedings  under  general  act. 

c.  Have  general  governmental   referendum  acts  been  accepted. 

d.  Is  there  a  time  limit  on  corporate  existence. 


D. 
POWER  TO  ISSUE. 

9.     Does  act  relied  upon  confer  authority  to  issue  bonds  as  proposed. 

10.  Does  act  confer  power  to  issue  bonds  for  particular  purpose  or  only 
generally  for  any  municipal  purpose;  if  latter,  is  purpose  specifically  pro- 
vided for  in  any  act  or  necessarily  implied. 

11.  Does  it  confer  power  to  issue  bonds  of  the  maturities  and  interest  rate 
proposed. 

12.  Does  it  contain  any  limitation  as  to  amount,  either  fixed  or  percentage  of 
assessed  valuation,  or  amount  per  capita  or  otherwise,  or  amount  which 
may  be  issued  in   any  year. 

13.  Will   bonds   be  general   obligations  of  municipality. 

14.  Does  act  contain  adequate  taxing  power,  or  are  there  tax  limitations  which 
affect  the  principal  or  interest  of  bonds. 

15.  Are  bonds  limited  to  actual  cost  or  expense;  if  so  what  may  be  included 
in  cost  or  expense. 


176  MUNICIPAL  BONDS 


E. 

ACTION  BY  ELECTORS. 

If  authorization  by  voters  required: 

16.  Has  all  action  required  of  bodies  or  officers  preliminary  to  and  directing 
the   election  been   taken. 

a.  Is  action  required  to  be  by  resolution  or  ordinance. 

b.  Was  action  taken  at  regular,  stated,  or  special  meetings. 

c.  If  special,  was  meeting  duly  called. 

d.  Was   a   quorum   present. 

e.  Introduction,   readings   and   passage   at   separate   meetings. 

f.  Did  required  number  vote. 

g.  Approval  by  Mayor  or  Chief  Executive,  or  passage  over  veto, 
h.  Was   ordinance  or   resolution   recorded,   if   required. 

i.      Was   ordinance   or    resolution   published,    if    required. 

j.      Was  any  protest  filed  which  would  prevent  calling  election. 

17.  Is  form  of  notice  of  election  proper,  and  does  it  conform  to  preliminary 
proceedings. 

a.  Statement  of  purpose  of  appropriation  or  bonds,  and  any  details  as 
to  purpose  or  terms  of  bonds. 

b.  Date  of  election. 

c.  Place  or  places. 

d.  Description   of   election   districts,   if   required. 

e.  Hours. 

f.  Qualification  of  voters. 

g.  Signed  by  proper  officers. 

18.  Was  it  posted  and  published,  if  both  are  required,  in  requisite  manner, 
and  for  requisite  periods  and  times.    Were  newspapers  official  if  required. 

19.  Regularity  of  registration  of  voters,  if  necessary  to  be  inquired  into. 

20.  Was  ballot,  and  proposition  thereon,  sufficient  in  form  and  substance. 

a.  Did  the  proposition  fully  state  the  matters  required  to  be  voted  upon 
in  accordance  with  statute   and  preliminary  proceedings. 

b.  Did  it  combine  two  or  more  purposes,  if  prohibited. 

c.  Was  it  official   if  required. 

21.  Was  the  canvass  of  the  result  of  the  election  properly  made,  and  was  the 
result  of  the  election  determined  by  the  required  officer  or  body,  and  does 
the  result  of  the  election  show  the  requisite  affirmative  vote. 


ACTION  BY  GOVERNING  BODY. 

22.  Are  all  proceedings  subsequent  to  vote,  or,  where  no  vote  is  required,  all 
proceedings  of  bodies  or  officers  duly  adopted  and  proper  in  form  and  sub- 
stance. 

a.  Is  a  resolution  or  ordinance  required. 

b.  Was  each  ordinance  or  resolution  properly  introduced,  read  required 
times,  and  finally  passed,  on  separate  days,  and  at  stated  or  regular 
meetings,  if  required,  or,  if  at  special  meeting,  was  it  duly  called. 

c.  Was  quorum  present  at  each  step  and  was  requisite  vote  obtained  at 
each  step  by  ayes  and  nays  if  required.* 


THE  ATTORNEYS'  FUNCTIONS  177 

d.  Was  ordinance  or  resolution  approved  by  Executive  or  passed  over 
veto. 

e.  Was  it  recorded. 

f.  Was  it  duly  published. 

g.  Was  it  duly  posted. 

23.  Was  resolution  or  ordinance  in  proper  form  as  to  title  and  enacting  clause. 

24.  Does  authorizing  ordinance  or  resolution  contain  complete  authority  for, 
and  details  as  to  purpose  and  bonds,  conforming  to  the  statute  and  pre- 
vious proceedings,  including  proper  tax  or  sinking  fund  provision.* 

25.  Has  form  of  bond  been  adopted. 

♦Note:  General  Municipal  Law,  New  York,  Sec.  5,  requires  two-thirds  vote 
and  statement  of  purpose  and  provision  for  taxes  to  pay  principal  and 
interest. 


G. 

CONSENTS  OF  OTHER  BOARDS  OR  BODIES. 

26.  Have  all  consents  or  action  by  Boards,  other  than  authorizing  body,  been 
obtained,  such  as  State  Boards  in  New  York  as  to  water,  sewerage,  light- 
ing, etc. ;  Congress  or  Secretary  of  War  as  to  bridges  over  navigable 
streams. 


H. 

SALE. 

27.     If  public  sale  required. 

a.  Has  proper  notice,  by  publication  or  posting,  been  given,   and  does 
offering  conform  to  previous  proceedings. 

b.  Was  notice  given  pursuant  to  proper  direction. 

c.  Was  it  necessary  to  offer  bonds  first  to   any  sinking  fund  or  other 
board. 


I. 

AWARD. 

28.     Have  bonds  been  duly  awarded  by  the  proper  authority. 

a.  Does  bid  conform  to  notice  of  sale,  if  any  required  or  given,  at  more 
than  par  and  interest  or  if  at  less  than  par  is  this  permissible. 

b.  To  highest  bidder,  or  person  bidding  lowest  rate,  if  required. 


J. 
PAYMENT. 

29.     Were  bonds  properly  paid  for. 

a.     Did  municipality  receive  par,  premium  and  accrued  interest. 


178  MUNICIPAL  BONDS 

K. 
FORM  OF  PROOF. 

30.  Are  proofs  in  proper  form. 

a.  Are   all   records  properly  certified. 

b.  Are  all   affidavits  in  proper  form. 

c.  Are  officials  making  certificates  or  affidavits  proper  officers  having 
charge  of  records  or  peculiar  knowledge  of  facts. 

d.  Are  records  properly  certified. 

e.  Are  affidavits  of  publication  originals,  and  do  they  shov?  exact  dates 
of  publication,  with  clipping  attached. 

L. 

FORM  OF  BOND. 

31.  Is  form  of  bond  correct. 

a.  Proper  designation  of  bond,  when  statute  provides  therefor. 

b.  Proper  name  of  obligor. 

c.  Proper  name  of  obligee,  if  registered. 

d.  Date. 

e.  Dates  of  maturity. 

f.  Principal  amount. 

g.  Principal  where  payable. 
h.  Interest  rate. 

i.      Dates  of  payment  of  interest. 

j.      Interest  where   payable. 

k.     Medium  in  which  principal  and  interest  payable. 

1.  Correct  recital  of  authorizing  resolution  and  vote  of  electors  if  re- 
quired. 

m.    Correct  recital  of  statutory   authority. 

n.  Correct  statutory  form  of  recital  giving  conclusive  presumption  of 
legality,  if  authorized. 

o.     General   recital. 

p.     Signed  by  proper  officers. 

q.     Sealed  with  proper  seal. 

r.     Were  officers  signing  in  office  at  time  of  actual  delivery  and  payment. 

s.  Are  provisions  for  registration  and  transfer,  conversion  or  exchange, 
proper,  including  endorsement. 

t.  If  coupon,  is  the  form  and  amount  of  the  coupon  correct,  and  prop- 
erly authenticated. 

M. 

MISCELLANEOUS. 

32.  Do  proofs  show  election  and  qualification,  of  all  officers  acting  in  the 
authorization  and  issuance  of  the  bonds   (especially  those  signing). 

?i3.  Where  referendum  act  is  relied  upon  for  authority  or  procedure,  get 
complete  proof  of   acceptance. 

34.  Where  statute  permits  referendum  on  acts  of  municipal  bodies,  or  permits 
recall  or  officers  see  that  no  referendum  or  recall  was  had;  or,  if  any,  the 
result. 


THE  ATTORNEYS'  FUNCTIONS  179 

35.  Where  any  proceeding  in  connection  with  the  bonds  is  to  be  initiated  by 
petition,  is  petition  adequately  signed;  if  by  owners  of  real  estate  eliminate 
executors,  and  if  necessary  get  special  proof  as  to  corporations,  trustees, 
partners  and  cases  other  than  individuals. 

36.  If  statutes  prohibit  elections  within  particular  periods  or  within  period 
after  previous  election,  see  that  vote  was  not  within  such  period,  as  in 
N.  Y.  Village  Law  or  Penn.  Genl.  Indebtedness  Statute. 

37.  In  New  York  cities  proof  that  certificate  has  been  filed  under  Home  Rule 
Law  (L.  1913,  ch.  247). 

N. 

LITIGATION. 

38.  Have  bonds  been  judicially  passed  upon  or  is  any  litigation  pending  or 
threatened. 

O. 

39.  REFUNDING  BONDS. 

a.  Was  issue  to  be  refunded,  legally  issued  if  that  must  be  investigated. 

b.  Are  bonds  to  be  refunded  outstanding  and  are  there  funds  applicable 
to  their   payment. 

c.  Were  old  bonds  duly  paid  for. 

d.  Has  there  been  any  litigation  on  old  bonds. 

e.  Where  statutes  restrict  refunding  to  bonds  not  declared  invalid,  offi- 
cial court  searches  must  be  secured. 

f.  Can  proceeds  exceed  principal  or  fixed  proportion  of  old  bonds. 


P. 

FUNDING  BONDS. 

40.     Can  they  be  issued  to  realize  more  than  principal  of  existing  debt  or  any 
part  thereof. 


Chapter  XVIII 
PRACTICAL  SUGGESTIONS 

The  rules  of  the  game. — The  municipal  bond  game  is  an 
extremely  interesting  pastime.  Like  bridge-whist  or  poker, 
the  latter  of  which  to  some  extent  it  resembles,  it  is  played 
according  to  a  number  of  rules,  most  of  which  are  prescribed 
by  higher  authority,  but  a  few  are  made  by  the  players  them- 
selves. Certain  consequences  follow  from  the  application  of 
these  rules.  Custom  decides  how  certain  things  shall  be  done, 
and  experience  shows  that  if  the  rules  are  followed,  better 
results  are  obtained  than  if  the  rules,  or  some  of  them,  are 
ignored.  It  is  the  purpose  of  this  concluding  chapter  to  draw 
deductions  from  experience  and  state  the  deductions  as  sug- 
gestions to  municipal  officials. 

Publicity. — Advertise  your  bonds  for  sale  in  the  financial 
newspapers  which  circulate  in  the  locality  from  which  you 
expect  bids.  There  are  no  better  mediums  for  general  pur- 
poses than  the  Daily  Bond  Buyer  and  the  Commercial  and 
Financial  Chronicle  of  New  York.  Both  of  these  papers 
reach  every  bond  house  of  consequence  in  the  United  States. 
If  you  give  your  proposed  sale  sufficient  publicity,  you  will, 
certainly  in  normal  times  and  probably  in  most  times,  have  no 
difficulty  in  securing  bids  which  you  can  accept.  Do  not  rely 
upon  advertising  in  local  newspapers  which  do  not  reach  the 
bond  dealers,  or  connive  to  shut  out  bids  by  doing  the  least 
permissible  amount  of  advertising. 

The  following  is  a  list  of  financial  publications  and  the 
territories  in  which  they  circulate.  This  list  is  not  intended 
to  be  inclusive,  but  it  is  believed  that  it  is  representative. 

The  Bond  Buyer   (New  York,  N.  Y.) 

This  publication  (issued  daily  and  weekly)  is  the  techni- 
cal organ  of  the  municipal  bond  business,  being  devoted  exclu- 
sively to  this  one  class  of  securities.  It  is  the  paper  usually 
selected  by  municipalities  in  which  to  publish  bond  sale  no- 
tices, bond  calls,  etc.     Municipal  bond  dealers,  banks  operat- 

180 


PRACTICAL  SUGGESTIONS  181 

ing  bond  departments  and  important  investors  in  municipal 
issues  depend  mainly  upon  the  Bond  Buyer  for  information 
relating  to  new  State,  city  and  other  municipal  bond  issues. 
Circulation  is  national. 

The  Commercial  and  Financial  Chronicle  (New  York,  N.  Y.) 
The  Chronicle  is  the  standard  weekly  financial  journal  of 
the  United  States  and  is  found  in  the  offices  of  bankers, 
brokers  and  financial  institutions,  and  is  quite  widely  read  by 
investors.  It  has  a  "State  and  City  Department"  in  which  is 
published  news  of  current  municipal  finance.  Circulation  is 
national. 

The  Wall  Street  Journal  (New  York,  N.  Y.) 

This  is  the  leading  financial  daily,  and  enjoys  a  wide  cir-. 
culation  among  bankers,  brokers,  investors,  etc.  Banking 
and  corporation  news  and  the  stock,  bond  and  money  mar- 
kets are  carefully  covered.     Circulation  is  national. 

Boston  News  Bureau  (Boston,  Mass.) 

In  New  England,  the  Boston  News  Bureau  virtually  du- 
plicates the  JVall  Street  Journal.  These  two  publications  are 
closely  allied. 

The  Manufacturers  Record  (Baltimore,  Md.) 

This  paper  is  the  leading  trade  journal  of  the  South. 
Departments  are  devoted  to  construction  and  financial  news, 
in  which  considerable  attention  is  given  to  public  improvement 
work  and  public  finance.  Carries  a  considerable  number  of 
official  notices  of  Southern  municipal  bond  offerings.  Circula- 
tion is  national. 

The  Economist  (Chicago,  III.) 

The  leading  financial  weekly  of  the  Middle  West.  De- 
voted to  general  financial  and  real  estate  news.  Local  circu- 
lation. 

The  Commercial  West  (Minneapolis,  Minn.) 

Financial  weekly  of  the  twin  cities  district.  Devotes  about 
a  page  to  municipal  finance  in  its  own  district.  Carries  some 
local  municipal  bond  advertising. 

The  Coast  Banker  (San  Francisco,  Cal.) 

Leading  banking  and  financial  paper  of  the  Pacific  Coast. 
Circulation  local.     Issued  monthly. 


182  MUNICIPAL  BONDS 

Pacific  Banker  (Portland,  Ore.) 

A  banking  and  investment  weekly  covering  Oregon,  Wash- 
ington, and  vicinity.     Reaches  local  municipal  bond  dealers. 

Another  means  of  advertising. — United  States  Mortgage 
and  Trust  Company  of  New  York  City  offers  a  very  valuable 
service  for  a  reasonable  charge.  It  will  prepare  and  mail  to 
a  selected  list  of  dealers  a  circular  describing  the  bonds  of- 
fered for  sale,  together  with  a  financial  statement  (prepared 
from  information  furnished  by  the  municipal  officials),  and 
form  for  bids  or  proposals. 

Preparation  of  bonds. — The  necessary  precautions  against 
forgery  and  fraud  which  should  surround  the  issuance  of  mu- 
nicipal securities,  have  not  always  been  exercised.  Cheaply 
printed  blanks  of  poor  quality  are  frequently  used  and  the 
preparation  is  not  subject  to  the  expert  supervision  under 
which  all  bonds  should  be  issued. 

The  possibility  of  forgery. — The  first  of  the  year  1919 
brought  to  light  the  methods  by  which  M.  H.  Cutter  of 
Chicago  had  forged  bonds  of  a  half  dozen  cities  and  towns, 
the  issues  involved  amounting  to  about  $600,000.  His  own 
firm  bought  and  attended  to  the  engraving  of  the  bonds,  thus 
removing  the  check  against  overissue  and  enabling  Cutter  to 
forge  the  bogus  bonds  and  manipulate  all  of  the  various  is- 
sues at  will.  The  serious  losses  resulting  recalled  the  Quig- 
ley  and  Prior  forgeries  of  preceding  decades. 

The  lack  of  precaution  on  the  part  of  many  municipalities 
in  the  issuance  of  their  securities  is  disquieting,  especially 
when  it  is  considered  that  such  obligations  form  a  substantial 
part  of  the  investments  of  executors,  trustees,  insurance  com- 
panies, and  banks.  For  a  municipality  to  sacrifice  the  neces- 
sary safeguards  in  the  issuance  of  securities  by  any  reduction 
in  expense  and  thereby  diminish  the  actual  value  of  the 
security  to  the  dealer  and  to  the  investor,  is  to  obtain  their 
preparation  at  a  correspondingly  high  cost  of  risk. 

How  fraud  may  be  avoided. — Have  your  bonds  printed 
and  prepared  by  a  responsible  banknote  company,  and  deal 
direct  with  the  printers.  The  preparation  of  coupon  bonds 
requires  a  high  degree  of  skill  and  experience,  both  being  neces- 
sary if  annoying  and  costly  mistakes  are  to  be  avoided.  The  finan- 
cial newspapers  will  furnish  names  and  addresses  of  the  bank- 
note companies,  which  alone  are  competent  to  do  such  work. 


PRACTICAL  SUGGESTIONS  183 

United  States  Mortgage  and  Trust  Company,  the  deposi- 
tary of  the  Investment  Bankers  Association,  will  prepare 
bonds  on  its  own  specially  water-marked  paper,  attend  to  the 
execution  of  the  bonds,  and  guarantee  the  genuineness  of  the 
signatures  of  the  municipal  officials  and  the  seal  impressed 
thereon,  at  prices  only  slightly  above  those  for  which  the 
same  bonds  could  be  secured  elsewhere.  A  similar  service  is 
offered  by  Security  Bank  Note  Company  of  Philadelphia  and 
Chemical  Bank  Note  Company  of  Rutherford,  New  Jersey. 
Bonds  so  prepared  and  certified  are  somewhat  more  attrac- 
tive to  dealers  than  bonds  not  so  prepared  and  certified,  and 
probably  bring  a  better  price. 

Contracts  for  the  preparation  of  bonds  made  with  other 
than  banknote  companies  may  be  unduly  expensive  because  an 
agent's  profit  Is  included  in  the  price.  Even  if  you  are  offered 
a  contract  calling  for  the  payment  of  $500  for  the  prepara- 
tion of  a  small  issue  of  bonds,  do  not  sign  it.  In  one  instance 
which  came  to  the  writer's  attention,  a  contract  of  this  kind 
was  made  and  broken  when  it  was  found  that  the  bonds  could 
be  prepared  for  $80. 

Side  agreements. — It  is  inadvisable  to  make  private  con- 
tracts for  the  sale  of  bonds,  or  to  enter  into  deposit,  fiscal 
agent  or  proceedings  contracts,  for  the  reasons  which  appear 
in  Chapter  IX.  It  is  ordinarily  unnecessary  to  make  con- 
tracts of  this  kind,  and  it  is  in  connection  with  such  contracts 
that  unpleasant  incidents  arise. 

In  dealing  with  bond  houses  and  bond  men,  it  should  be 
borne  in  mind  that  the  representatives  of  the  better  class  of 
bond  houses  are  very  highly  trained  men.  These  men  are 
ethical  and  fair  in  their  dealings  with  municipal  officials,  but 
the  municipal  official  is  at  a  disadvantage  in  dealing  with 
them.  The  American  theory  of  government  Is  that  any  per- 
son elected  to  public  office  Is  fully  competent  to  perform  the 
duties  of  that  office.  As  a  matter  of  fact,  the  average  munici- 
pal official  is  not  a  match  for  the  skilled  bond  buyer. 

Place  of  payment. — It  is  an  advantage  to  the  municipality 
to  contract  to  pay  interest  and  principal  of  bonds  at  a  New 
York  bank  or  a  par  point,  that  is,  a  city  in  which  the  banks 
are  not  charged  with  exchange  for  the  collection  of  checks. 
Local  banks  like  the  business  and  the  advertising  which  fol- 
low the  deposit  of  funds  In  advance  of  and  to  meet  such  pay- 
ments, and  the  naming  of  the  bank  in  the  bond  and  coupons 


184  MUNICIPAL  BONDS 

as  the  designated  place  of  payment.  But  bonds  payable  In 
New  York  or  at  a  par  point  bring  a  better  price. 

Promptness  in  payment. — Have  funds  on  hand  in  the 
designated  bank  for  the  payment  of  interest  and  principal  be- 
fore either  are  due.  This  will  preserve  your  credit  and  save 
you  a  great  deal  of  annoyance.  It  may  seem  a  small  thing  to 
delay  for  a  few  days  the  payment  of  semi-annual  interest 
coupons,  but  it  is  a  cause  of  alarm  to  your  bondholder.  If 
coupons  are  presented  and  no  funds  are  available,  they  will 
be  returned  through  the  usual  channels  to  the  bank  with 
which  deposited,  and  by  that  bank  to  the  depositor.  Even  if 
the  depositor  is  subsequently  advised  that  the  coupons  will  be 
paid,  the  process  of  collection  must  be  again  put  into  motion. 

Employment  of  counsel. — When  a  bond  issue  is  contem- 
plated, it  should  be  remembered  that  sooner  or  later  the  pro- 
ceedings will  be  passed  upon  by  counsel  generally  recognized 
to  be  specialists  in  the  examination  of  such  proceedings. 

Until  recent  years,  it  was  the  practice  for  the  purchaser 
to  select  his  own  attorney,  but  within  the  last  decade  the  prac- 
tice has  become  well  established,  at  least  in  the  Eastern  States, 
for  the  municipality  to  retain  expert  counsel  in  the  first  in- 
stance and  have  him  conduct  all  of  the  proceedings  in  con- 
nection with  the  bond  Issue,  and  give  his.  final  approving  opin- 
ion when  the  bonds  are  delivered.  This  does  not  imply  any 
reflection  upon  the  city's  own  counsel.  The  smaller  munici- 
pality issues  bonds  at  infrequent  Intervals,  and  political 
changes  are  sufficiently  rapid  so  that  the  corporation  counsel 
may  have  occasion  to  conduct  no  proceedings  for  the  issue  of 
bonds.  The  specialists  are  willing  to  work  with  local  coun- 
sel, and  In  fact  prefer  doing  so.  If  the  city  retains  the  expert, 
it  Is  of  course  responsible  for  his  fee,  but  the  amount  of  the 
fee  Is  Included  in  the  higher  price  received  for  the  bonds  when 
sold.  If  the  bidder  knows  that  he  must  retain  his  own  attor- 
ney, he  will  make  an  allowance  for  the  fee  in  submitting  his 
bid.  If  he  does  not  have  to  meet  this  item  of  expense,  his  bid 
will  be  higher. 

Modern  practice  requires  the  municipality  to  furnish  an 
acceptable,  that  Is  a  merchantable,  legal  opinion  with  its 
bonds,  and  dealers  understand  that  their  money,  time,  and 
effort  will  not  be  wasted  and  the  bonds  will  be  promptly  de- 
livered, if  such  an  opinion  Is  forthcoming. 


APPENDICES 


Appendix  A 
OUTLINE  ANALYSIS  OF  SUBJECT 

Chapter  I 
THE  PROBLEM  STATED 

A.  The  municipal  bond  is  a  creature  of  law. 

a.     General  principles  must  be  studied. 

B.  The  municipality  existed  before  the  nation. 

C.  Municipal   needs  create   municipal   debt. 

D.  Necessity  for  borrowing  money. 

a.     Annual  taxation  inadequate;  illustrated. 

E.  Procedure  of  bond  issue  outlined. 

F.  Forms  of: 

a.  Tax  ordinance; 

b.  Municipal  budget; 

c.  Bond  ordinance. 

Chapter  II 
THE  MUNICIPAL  BOND 

A.  Is  a  negotiable  instrument: 

a.  Attributes  of  negotiability; 

b.  Municipal  bond  has  all  these  elements; 

c.  Loses  for  the  time  its  negotiability  by  delivery,  if  registered. 

B.  Conditions  of  negotiability. 

C.  The  component  parts  of  a  municipal  bond  are: 

a.  Face: 

1.  Title  of  the  instrument; 

2.  Form: 

(1)  Name   of  promissor; 

(2)  Name  of  promisee; 

(3)  Principal  sum  to  be  paid; 

(4)  Due  date;  a  promise  to  pay; 

(5)  Interest  at  the  rate  stated; 

(6)  The  place  and  medium  of  payment; 

(7)  Conversion    provision; 

(8)  Recital  of  authority   and  purpose; 

(9)  Estoppel   clause; 

(10)  Testimonium; 

(11)  Signatures  and  seal. 

b.  Coupon,  which  is  an  independent  promise  to  pay. 

c.  Back: 

1.  Filing. 

2.  Panels   upon  which   appear  forms  for  the  registration   certifi- 

cates. 

187 


MUNICIPAL  BONDS 

Chapter  III 
MUNICIPAL  CORPORATIONS 

a.  Definition   of  municipal   corporations. 

b.  They  are  creatures  of  the  State. 

1.  Constitutional  provisions,  and 

2.  Legislative  control. 

c.  They  are  created  by: 

1.  Special  charter  or  pursuant  to 

2.  General  laws,  and  may  be 

3.  De  facto  corporations. 

a.  Powers  of  municipal  corporations  are 

L     Express,  the  principal  powers  being  the 

(1)  Police  power; 

(2)  Power  of  taxation,  and 

(3)  Eminent  domain. 

2.     Implied,  incident  to  the  express  grant. 

b.  Powers  of  municipal  corporations  are  divided  into 

1.  Governmental,  and 

2.  Proprietary  powers. 

a.     Municipal  corporations  are  classified   as 

1.  Counties; 

2.  True  municipal  corporations,  and 

3.  Quasi-municipal  corporations,  among  which  are 

(1)  School  districts  and  various 

(2)  Taxing  districts. 


Chapter  IV 
MUNICIPAL  PROPERTY  AND  IMPROVEMENTS 

A.  Increase  of  public  activities. 

a.  Earliest  recorded  history  shows  co-operation  in  construction  of: 

1.  Roads; 

2.  Bridges; 

3.  City  walls. 

b.  Public  health  was  seen  to  require: 

L     Water; 

2.  Sewers; 

3.  Baths. 

c.  Public  charity  and  the  humanizing  influence  of  Christianity  created: 

L     Hospitals; 
2.     Asylums. 

d.  The  evolution  of  the  modern  city. 

B.  Municipal   expenditures. 

a.  General  considerations;   what  is   a  municipal   purpose? 

b.  The  expenditures  are   for: 

1.  Running  expenses; 

2.  Debt  service,  funds  for  which  are  raised  by  annual  taxation, 
and 

3.  Public  property  or   improvements,   funds   for   which   are   bor- 
rowed. 


APPENDIX  A  189 

c.     Improvements    are   made    and    property    is    acquired    in    one    of    two 
capacities: 

1.  Governmental  and 

2.  Proprietary. 

C.  Public  Property. 

a.  Capacity  to  hold  and  acquire  property. 

b.  Mode  of  acquisition  is  by 

1.  Purchase; 

2.  Gift; 

3.  Condemnation. 

c.  Limitations  on  acquisition  are: 

1.  Popular  vote  and  the 

2.  Referendum. 

D.  Public  Improvements. 

a.  Nature  and  grounds  of  power  to  make. 

b.  Statutory'  provisions  such  as: 

1.  Act  Concerning  Municipalities  in  New  Jersey; 

2.  Second-Class  Cities  Law  and  the  Village  Law  in  New  York. 

c.  Are,  among  others: 

1.  Public  buildings; 

2.  Streets,  waj^s  and  bridges; 

3.  Sewers   and  drains; 

4.  Water  supply; 

5.  Lighting; 

6.  Wharves  and  docks; 

7.  Parks  and  public  places; 

8.  Markets ; 

9.  Schools ; 
10.     Libraries. 

E.  Improvements  outside  of  municipality. 

F.  Public  utilities. 

G.  Building  houses  and  selling  commodities  to  public. 


Chapter  V 
TAXATION  AND  LIMITATION  OF  TAXES 

A.  The  Power  to  Tax. 

a.  Tax  defined. 

b.  Primary  form  a  direct  property  tax. 

c.  Power  to  tax  is 

1.  Inherent  in  the  sovereign; 

2.  Exercised  by  the  legislature  which  may  delegate  it  to 

(1)  Municipalities,   and  to 

(2)  Local   boards. 

d.  Taxes  can  be  levied  only  for  public  use. 

B.  Classes  of  taxes  defined. 

a.  Capitation  or  poll. 

b.  Property. 

1.  General. 

2.  Assessments. 

c.  Excise  and  income. 

C.  Taxation  for  debt  service. 

a.  Illustrated. 

b.  Its  importance. 


190  MUNICIPAL  BONDS 

D.  Limitations  on  tax  rates.     , 

a.  Illustrated. 

b.  Arguments  against  any  tax  limit  for  general  purposes. 

c.  Arguments  against  any  tax  limit  for  debt  service. 

E.  Revenues. 

Chapter  VI 
MUNICIPAL  BORROWING 

A.  The  power  to  incur  indebtedness. 

a.  Nature  and  scope. 

b.  Municipal  purposes. 

c.  Does  not  include  the  power  to  issue  negotiable  securities. 

B.  Limitations  on  the  power  to  incur  debt. 

a.  General  considerations. 

b.  Limitations  are 

1.  Constitutional  or 

2.  Statutory. 

c.  Illustrated. 

C.  The  power  to  issue  negotiable  instruments. 

a.  Original  issues. 

1.  Nature  of  power. 

2.  Nature  of  power  is  wholly  statutory. 

b.  Illustrated. 

c.  Refunding. 

d.  Ratification  by  legislature. 

D.  Short-term  loans. 

Chapter  VII 
THE  PROMISSOR  IN  THE  BOND 

A.  The  Sovereign  or  the  State. 

a.     Cannot  be  sued  without  its  consent. 

B.  The  county. 

a.  The  same  property  is  taxed  which  is  taxed  for  municipal  purposes. 

b.  Debt  of  subdivisions. 

c.  Debt  small  compared  to  assessed  valuation. 

C.  The  municipality,  which  may  have: 

a.  Implied  power  to  borrow  but  must  have 

b.  Express   power  to   issue   negotiable   instruments. 

D.  The  quasi-municipality,   which  may 

a.  Borrow  and  tax; 

b.  Borrow  but  not  tax; 

c.  Be  taxed  but  may  not  borrow. 

Chapter  VIII 

THE  PROMISE  AND  THE  PURPOSE  OF  THE  BOND 

A.     The  character  of  the  promise. 
a.     Limited  by  tax  rates: 

1.  Constitutional. 

2.  Statutory. 

3.  Results  in  limited  obligation. 


APPENDIX  A  191 

b.  Limited  to  a  special  fund,  i.e.,  assessments. 

1.  Bonds  may.  not  be   negotiable  instruments. 

2.  Federal  tort  theory. 

c.  Limited  by  area  of  land  taxed. 
B.     The  purpose. 

a.  Bonds  issued  for  self-sustaining  public  utilities  such  as: 

L     Water  works. 

2.     Wharves,  docks  and  markets. 

b.  Bonds  issued  for  non-revenue   producing  improvements  such  as: 

L     Streets  and  sewers. 

2.     Schools,  hospitals  and  parks. 

Chapter  IX 
THE  MATURITY  OF  THE  BOND 

A.  Bonds  may  be  classified   as  to  time  of  payment: 

a.  Term  bonds  which   are  absolutely 

1.  Due  and  payable   at  one  time,  or 

2.  Callable  after  a  stated  date. 

b.  Debt  service  for  term  bonds:  sinking  funds. 

1.  Contract  with  bondholder; 

2.  Disadvantages  of  sinking  funds. 

c.  Serial   bonds  which   are   payable  in: 

1.  Equal   annual   installments; 

2.  Substantially  equal   annual   installments; 

3.  Deferred  installments. 

d.  Debt  service   for   serial   bonds:  no  sinking  fund. 

B.  Term  of  bonds  may  be  limited  to  life  of  improvement. 

a.     Reason  for  such  limitation. 

Chapter  X 

SALE  AND  AWARD 

A.  Private  Sale  defined. 

a.  Advantages: 

1.  To  municipality; 

2.  To  broker. 

b.  Disadvantages: 

L     To  municipality; 
2.     To  broker. 

B.  Public  Sale  defined. 

a.  Advantages  to  municipality: 

1.  Competition; 

2.  Protection  to  officers. 

b.  Disadvantages  to  municipality: 

1.  Market  conditions; 

2.  Technical  errors  in  procedure. 

c.  Illustrative   statutory   provisions: 

1.  In  New  York; 

2.  In  New  Jersey. 

C.  Par  Sales  are  required  by  most  statutes. 

a.  Economic  fallacy. 

b.  Political   necessity. 

c.  Evasion  by 


192  MUNICIPAL  BONDS 

1.  Fiscal  agency  contracts; 

2.  Proceedings  contracts; 

3.  Deposit  agreements. 

d.  Expenses  of  sale. 

e.  Irregularities  in   procedure. 

D.  Brokerage   and  commissions. 

E.  Forms  of 

a.  Notice  of  sale; 

b.  Propositions  pursuant  thereto. 

Chapter  XI 
DEFAULT,  AND  REMEDY  OF  THE  BONDHOLDER 

A.  Default  defined. 

a.  Consequences  as  to: 

1.  Interest; 

2.  Principal. 

b.  Prevalence  of. 

c.  Reasons  for. 

1.  Inability,  because  of 

(1)  Lack  of  authority  to  issue; 

(2)  Limited  tax  rate; 

(3)  Shrinkage  of  assessed  valuations. 

2.  Bad  faith. 

B.  Remedy  of  the  Bondholder. 

a.  Bonds  are  not  liens  upon  specific  property. 

b.  Necessity  for  obtaining  judgment. 

c.  Mandamus  to   levy  tax. 

1.  Where  sufficient  tax  may  be  levied. 

2.  Where  sufficient  tax  may  not  be  levied. 

d.  Actions  based  on  contract. 

e.  Legislative  relief. 

f.  Good  faith  of  issuing  municipality. 

Chapter  XII 
BONDS  AS  INVESTMENTS 

A.  Definition  and  general  considerations. 

B.  Investments  by  individuals. 

a.     Elements  of  an  ideal  investment: 

1.  Security  of   principal; 

2.  Fixed  or  definite  interest; 

3.  Fair  income  return; 

4.  Merchantability; 

5.  Good  collateral   for  loans; 

6.  Freedom  from  taxation; 

7.  Freedom  from  care; 

8.  Satisfactory  maturity; 

9.  Convenient  denomination; 
10.  Possibility  of  appreciation. 

B.  Investments  by  fiduciaries. 

a.     Executors,  trustees  and  savings  banks. 

1.     Regulated  by  statutes — Illustration. 

C.  To  secure  postal  savings  deposits. 


APPENDIX  A  193 

Chapter  XIII 
TAXATION  OF  BONDS 

A.  General  considerations. 

B.  The  taxing  power. 

a.  Definition  of  the  taxing  power. 

b.  Taxing  power   of  the   United   States. 

c.  Limitations  upon  the  Federal  taxing  power. 

d.  Taxing  power  of  the  States. 

e.  Limitations  upon  the  taxing  power  of  the  States. 

C.  Taxation  of  the  principal  of  State  and  municipal  bonds. 

a.  Taxation  by  the  United  States. 

b.  Taxation  by  the  States. 

D.  Taxation  of  the  income  of  State  and  municipal  bonds. 

a.  Nature  of  the  tax. 

b.  Taxation  by  the  United  States;  the  16th  amendment  to  the  Federal 

Constitution. 

c.  Taxation  by  the  States. 

E.  Taxation   of  bonds  of  non-residents. 

F.  Inheritance  Taxes. 

Chapter  XIV 
VALUATION  OF  BONDS 

A.  Money  is  a  commodity.     The  price  of  its  use  is: 

a.  Interest: 

1.  Normal  yield. 

2.  Net  yield. 

3.  Tables  of  bond  values. 

4.  Basis. 

b.  Fluctuations    and   differences   in   yield. 

c.  Purchasing  power  of  money. 

d.  Market  conditions. 

B.  Bonds  are  not  equally  valuable;   differences  exist  between  bonds  of 

a.  City ; 

b.  County ; 

c.  Tax  districts,  etc. 

C.  Bonds  of  the  same  class  are  not  equally  valuable.     The  factors  are: 

a.  Valuations  of  taxable  property; 

b.  Indebtedness; 

c.  Tax  rates; 

d.  Population; 

e.  Municipal  credit. 

D.  The  practice  of  valuation  described. 

E.  Differences  in  expert  opinion. 

F.  Sources  of  information. 

Chapter  XV 
INCONTESTABILITY  AND  VALIDATION 

A.    The  menace  of  default. 

a.  Improvement  in  standards  of  honesty. 

b.  Improvement  in   legislation. 


194  MUNICIPAL  BONDS 

B.  Estoppel  by  recital. 

a.  Defined. 

b.  Effect. 

C.  Short  statutes  of  limitations, 

a.     Illustrations. 

D.  Validation   by    decree    of 

a.  Administrative   department; 

b.  Court. 

1.  Doctrine  of  res  adjudicata. 

2.  Constitutional  difficulties  illustrated. 

c.  Court  in  Georgia. 

E.  Registration  by  officials,  effect  when 

a.  Judicial  function; 

b.  Ministerial   function. 

F.  Certification  of  signatures  and  seal. 


Chapter  XVI 
PARTICULAR  BONDS 

A.  Considered  as  to  issuing  unit: 

a.  Cities; 

b.  Counties; 

c.  Minor   municipalities; 

d.  Tax  districts. 

B.  Considered  as  to  purpose: 

a.  To  provide  income-producing  utilities; 

b.  To  provide  other  properties  or  improvements. 

C.  Considered  as  to  payment: 

a.  Payable  from  direct  general  tax; 

b.  Payable  from  assessments. 

D.  Considered  as  to  popular  assent: 

a.    Electoral  bonds. 

Chapter  XVII 
THE  ATTORNEYS'  FUNCTIONS 

A.  General  considerations. 

a.     Difficulties  usually  arise  before  issue. 

B.  When  retained  by  the  municipality. 

a.  The  advantages. 

b.  The  procedure. 

C.  When  retained  by  the  purchaser. 

a.  The  disadvantages. 

b.  The  procedure. 

c.  Failure   to    approve. 

D.  The  record  of  proceedings. 

a.  Enables  counsel  to  form  opinion. 

b.  Contents  of  the  record. 

E.  The  opinion. 

a.  Its  usual  form,  preliminary  and  final. 

b.  The  meaning  of  the  opinion. 

c.  Qualified  opinions. 

d.  Merchantability  of  the  opinion. 


APPENDIX  A  195 

Chapter  XVIII 
PRACTICAL  SUGGESTIONS 


A.  Publicity  of  bond  sales. 

1.  Advertising.     List  of  periodicals. 

2.  Circulars. 

B.  Preparation  of  bonds — certification. 

C.  Side  agreements  with  dealers. 

D.  Place  of  payment  of  principal  and  interest. 

E.  Promptness  in  payment. 

F.  Employment  of  counsel. 


Appendix  B 

THE  MUNICIPAL  FINANCE  ACT  OF 
NORTH  CAROLINA. 

An  Act  to  Amend  and  Re-enact  the  Municipal  Finance  Act,  Being  Sec- 
tions 2918  to  2961,  Consolidated  Statutes  of  North  Carolina. 

The  General  Assembly  of  North  Carolina  do  enact: 

Section    1.      That    sections    two    thousand    nine    hundred    and    Sections  of  law 
.    ,  ,  1      •        1         I       I  J      •  •  •      1      •  amended  and 

eighteen  to  two  thousand  nine   hundred   and   sixty-nine,    inclusive,    reenacted. 

of  the  Consolidated  Statutes  of  North  Carolina  be  and  are  hereby 

amended  and  reenacted  to  read  as  follows: 

SUBCHAPTER  III.     MUNICIPAL  FINANCE  ACT 


Article  23.     General  Provisions 

2918.  Short  title.  This  act  may  be  cited  as  "The  Municipal 
Finance  Act,  1921." 

2919.  Meaning  of  terms.  In  this  act,  unless  the  context  other- 
wise requires,  the  expressions: 

"Bond  ordinance"  means  an  ordinance  authorizing  the  issuance 
of   bonds   of  a   municipality; 

"Clerk"  means  the  person  occupying  the  position  of  clerk  or 
secretary  of  a  municipality; 

"Financial  officer"  means  the  chief  financial  officer  of  a  munici- 
pality; 

"Funding  bonds"  means  bonds  issued  to  pay  or  extend  the  time 
of  payment  of  debts  incurred  before  December  sixth,  one  thousand 
nine  hundred  and  twenty-one,  not  evidenced  by  bonds; 

"Governing  body"  means  the  board  or  body  in  which  the  general 
legislative  powers  of  a  municipality  are  vested; 

"Local  improvement"  means  any  improvements  or  property  the 
cost  of  which  has  been  or  is  to  be  specially  assessed  in  whole  or 
in  part; 

"Municipality"  means  and  includes  any  city,  town,  or  incorpo- 
rated village  in  this  State,  now  or  hereafter  incorporated; 

"Necessary  expenses"  means  the  necessary  expenses  referred  to 
in  section  seven  of  article  seven  of  the  Constitution  of  North 
Carolina; 

"Publication"  includes  posting  in  cases  where  posting  is  author- 
ized by  this  act  as  a  substitute  for  publication  in  a  newspaper; 

"Refunding  bonds"  means  bonds  issued  to  pay  or  extend  the 
time  of  payment  of  debts  incurred  before  March  seventh,  one 
thousand  nine  hundred  and  seventeen,  evidenced  by  bonds; 

197 


Short  title. 
Terms  defined. 


Bond 
ordinance. 


Clerk. 


Financial 

officer. 

Funding  bonds 


Governing 
body. 

Local  improve- 
ment. 


Municipality. 

Necessary 
expense. 


Publication. 


Refunding 
bonds. 


198 


MUNICIPAL  BONDS 


Special  assess- 
ments. 


Specially 
assessed. 

Publication  of 
ordinances  and 
notices. 


Application 
and  construc- 
tion of  act. 


"Special  assessments"  means  special  assessments  for  local  im- 
provements, levied  on  abutting  property  or  other  property  specially 
benefited,  or  on  street  railroad  companies  or  other  companies  or 
individuals  having  tracks  in  streets  or  highways,  and  "specially 
assessed"  has  a  corresponding  meaning. 

2920.  Publication  of  ordinance  and  notices.  An  ordinance  or 
notice  required  by  this  act  to  be  published  by  a  municipality  shall 
be  published  in  a  newspaper  published  in  the  municipality,  or, 
if  no  newspaper  is  published  therein,  in  a  newspaper  published 
in  the  county  and  circulating  in  the  municipality,  or,  if  there 
is  no  such  newspaper,  the  ordinance  or  notice  shall  be  posted 
at  the  door  of  the  building  in  which  the  governing  body 
usually  holds  its  meetings  and  at  three  other  public  places  in  the 
municipality. 

2921.  Application  and  construction  of  act.  This  act  shall  apply 
to  all  municipalities.  Every  provision  of  this  act  shall  be  con- 
strued as  being  qualified  by  constitutional  provisions,  whenever 
such  construction  shall  be  necessary  in  order  to  sustain  the  con- 
stitutionality of  any  portion  of  this  act.  If  any  portion  of  this 
act  shall  be  declared  unconstitutional,  the  remainder  shall  stand, 
and  the  portion  declared  unconstitutional   shall  be   exscinded. 


Article  24.    Budget  and  Appropriations 


Fiscal  year. 


Preparation  of 
budget. 


Basis  of 
budget. 


Contents  of 
budget. 

Itemized 
estimate  of 
expenses. 


Contingent 
fund. 


Itemized  esti- 
mate of  taxes 
and  revenue. 


2922.  The  fiscal  year.  The  fiscal  year  of  every  municipality 
shall  begin  either  on  the  first  day  of  June'  or  on  the  first  day  of 
September,  as  the  governing  body  of  the  municipality  may  deter- 
mine. 

2923.  Budget  prepared.  Not  earlier  than  one  month  before,  nor 
later  than  one  month  after  the  beginning  of  each  fiscal  year  of  a 
municipality,  the  governing  body  shall  cause  to  be  prepared  a  plan 
for  financing  the  municipality  during  said  fiscal  year,  which  plan 
shall  be  known  as  the  budget  and  shall  be  based  upon  detailed 
estimates  furnished  by  the  several  departments  and  other  divisions 
of  the  municipal  government. 

2924.  fVhat  budget  shall  contain.  The  budget  shall  present  the 
following  information: 

1.  An  itemized  estimate  of  the  appropriations  necessary  to  be 
made  for  the  current  expenses  and  for  permanent  Improvements 
for  each  department  and  division  of  the  municipal  government  for 
the  fiscal  year  (exclusive  of  expense  to  be  paid  for  by  means  of 
bonds  issued  under  article  twenty-six  of  this  chapter),  for  the 
payment  of  the  principal  and  interest  of  debts  and  for  deficits  of 
the  previous  fiscal  year,  with  comparative  statements  in  parallel 
columns  of  expenditures  for  corresponding  Items  so  far  as  possible 
for  the  two  preceding  fiscal  years.  This  estimate  may  Include  a 
contingent  fund  not  designated  for  any  particular  purpose  not 
exceeding  five  per  centum  of  the  total  estimated  amount  of  other 
appropriations. 

2.  An  itemized  estimate  of  the  taxes  required  and  of  the  esti- 
mated revenues  of  the  municipality  from  all  other  sources  for  the 
fiscal  year,  the  unencumbered  balances  of  the  appropriations,  and 
of  the  surplus  revenues  of  the  previous  fiscal  year,  with  compara- 
tive statements  in  parallel  columns  of  the  taxes  and  other  revenues 
for  the  two  preceding  fiscal  years. 


APPENDIX  B 


199 


3.  A  statement  of  the  financial  condition  of  the  municipality,  and 
such  other  information  as  the  governing  body  may  deem  advisable 
to  state. 

2925.  Copy  of  budget  filed  for  inspection.  A  copy  of  the  budget 
shall  be  filed  in  the  office  of  the  clerk  of  the  municipality  for  public 
inspection  not  later  than  ten  days  before  its  adoption  by  the  gov- 
erning body,  and  a  public  hearing  shall  be  given  thereon  by  the 
governing  body  before  the  adoption  of  the  budget,  notice  of  which 
hearing  shall  be  published. 

2926.  Change  of  fiscal  year.  The  fiscal  year  may  be  changed  by 
resolution  of  the  governing  body,  which  resolution  shall  declare 
that  the  fiscal  year  shall  thereafter  begin  on  the  first  day  of 
September  or  June,  as  the  case  may  be.  A  budget  and  appropria- 
tion ordinance  shall  be  adopted  for  a  period  commencing  at  the 
expiration  of  the  current  fiscal  year,  in  which  such  resolution  is 
passed,  and  ending  at  the  end  of  the  next  succeeding  new  fiscal 
year.  Such  a  budget  shall  be  adopted  within  the  month  preceding 
or  the  month  following  the  beginning  of  such  period. 

2927.  Annual  appropriation  ordinance.  Not  later  than  one 
month  after  the  beginning  of  the  fiscal  year,  the  governing  body 
shall  pass  the  annual  appropriation  ordinance  for  the  fiscal  year, 
which  shall  be  based  on  the  budget.  The  total  amount  of  appro- 
priations shall  not  exceed  the  total  of  the  estimated  revenue, 
unencumbered  balances  and  surplus  receipts. 

2928.  Appropriations  made  before  annual  ordinance.  In  the  in- 
terval between  the  beginning  of  a  fiscal  year  and  the  adoption  of 
the  annual  appropriation  ordinance  the  governing  body  may  make 
appropriations  for  the  purpose  of  paying  fixed  salaries,  the  prin- 
cipal and  interest  of  bonded  debts  and  other  loans,  the  stated  com- 
pensation of  officers  and  employees  and  indebtedness  for  work 
performed  or  materials  furnished  under  contracts  made  before  the 
beginning  of  the  fiscal  year,  or  for  the  ordinary  expenses  of  the 
municipality,  which  appropriations  shall  be  chargeable  to  the 
appropriations  in  the  annual  appropriation  ordinances  for  that 
year. 

2929.  Amendment  of  appropriations.  At  any  time  after  the  pas- 
sage of  the  annual  appropriation  ordinance,  the  governing  body 
may  amend  such  ordinance  so  as  to  authorize  the  transfer  of 
balances  appropriated  for  one  purpose  to  another  purpose,  or  to 
appropriate  available  revenues  not  included  in  the  annual  budget. 

The  amendatory  ordinance,  unless  it  be  for  the  appropriation  of 
available  revenues  not  included  in  the  annual  budget,  shall  be 
published  one  or  more  times  at  least  one  week  before  its  final 
passage,  with  notice  of  the  time  when  and  place  where  it  will  be 
finally  passed:  Provided,  hoivever,  that  such  ordinance  may  be 
passed  during  the  last  three  months  of  a  fiscal  year,  without  any 
previous  publication  or  notice. 

2930.  Balances  revert  for  future  appropriations.  At  the  close  of 
each  fiscal  year  the  unencumbered  balance  of  each  appropriation 
shall  revert  to  the  general  fund,  and  shall  be  subject  to  future 
appropriation. 

2931.  Funds  specially  applied  not  affected.  Nothing  herein  shall 
be  construed  to  permit  revenues  which  by  statute  are  appropriated 
to  a  particular  purpose  to  be  appropriated  to  any  other  purpose, 
but  such  revenue  shall  nevertheless  be  included  in  the  budget. 


Statement  of 
financial  condi- 
tion. 

Other  informa- 
tion. 

Copy  of  budget 
filed. 

Public  hearing, 


Fiscal  year 
may  be 
changed. 


Budget  and 

appropriation 

ordinance. 


Time  for  adop- 
tion of  budget. 

Annual 

appropriation 

ordinance. 

Limit  of 
appropriations. 


Temporary 
appropriations. 


Purposes. 


Amendment  of 
appropriations. 


Amendatory 
ordinance  to  be 
published. 


Proviso: 
Amendment 
within  last 
quarter. 

Balances  sub- 
ject to  future 
appropriations. 


Funds  appro- 
priated by 
statutes. 


200 


MUNICIPAL  BONDS 


Article  25.    Temporary  Loans 


Temporary 
loans  in  antici- 
pation of 
collections. 


Payment  of 
loans. 

Budget  to 
provide  for 
payment  of 
loans. 

Loans  to  pay 
judgments  or 
interest. 


Time  for 
payment. 

Loans  exceed- 
ing one  per 
cent  of  tax 
values. 


Loans  in 
anticipation  of 
bond  sales. 


Maximum 
amount. 
Time  of 
payment. 

Power  to  retire 
loans. 

Proviso: 
Reduction  of 
bond  issue. 


Negotiable 
notes. 

Renewal. 


Final  limit. 
Interest  rate. 

Sale  of  notes. 

Resolution  for 

temporary 

loans. 


2932.  Money  borroived  to  meet  appropriations.  A  municipality 
may  borrow  money  for  the  purpose  of  meeting  appropriations  made 
for  the  current  fiscal  year,  in  anticipation  of  the  collection  of  the 
taxes  and  revenues  of  such  fiscal  year,  and  within  the  amount  of 
such  appropriations.  Such  loans  shall  be  paid  not  later  than  the 
tenth  day  of  October  in  the  next  succeeding  fiscal  year.  Provision 
shall  be  made  in  the  annual  budget  and  annual  appropriation  ordi- 
nance of  each  fiscal  year  for  the  payment  of  all  unpaid  loans  predi- 
cated upon  the  taxes  and  revenues  of  the  previous  fiscal  year. 

2933.  Money  borroived  to  pay  judgments  or  interest.  For  the 
purpose  of  paying  a  judgment  recovered  against  a  municipality,  or 
paying  the  principal  or  interest  of  bonds  due  or  to  become  due 
within  two  months  and  not  otherwise  adequately  provided  for,  a 
municipality  may  borrow  money  in  anticipation  of  the  receipt  of 
either  the  revenues  of  the  fiscal  year  in  which  the  money  is  bor- 
rowed or  the  revenues  of  the  next  succeeding  fiscal  year.  Such 
loans  shall  be  paid  not  later  than  the  end  of  such  next  succeeding 
fiscal  year.  In  the  event,  however,  that  a  judgment  or  judgments 
against  a  municipality  amount  to  more  than  one  cent  per  hundred 
dollars  of  the  assessed  valuation  of  taxable  property  of  the  munici- 
pality for  the  year  in  which  taxes  were  last  levied  before  the 
recovery  of  the  judgment,  a  loan  to  pay  the  judgment  may  be 
made  payable  in  not  more  than  five  substantially  equal  annual 
installments,  beginning  within  one  year  after  the  loan  is  made. 

2934.  Money  borroived  in  anticipation  of  bond  sales.  At  any 
time  after  a  bond  ordinance  has  taken  effect  as  provided  in  article 
twenty-six  herein,  a  municipality  may  borrow  money  for  the  pur- 
poses for  which  the  bonds  are  to  be  issued,  in  anticipation  of  the 
receipt  of  the  proceeds  of  the  sale  of  the  bonds,  and  within  the 
maximum  authorized  amount  of  the  bond  issue.  Such  loans  shall 
be  paid  not  later  than  three  years  after  the  time  of  taking  effect 
of  the  ordinance  authorizing  the  bonds  upon  which  they  are  predi- 
cated. The  governing  body  may,  in  its  discretion,  retire  any  such 
loans  by  means  of  current  revenues,  special  assessments,  or  other 
funds,  in  lieu  of  retiring  them  by  means  of  bonds:  Provided, 
hoivever,  that  the  governing  body,  before  the  actual  retirement  of 
any  such  loan  by  any  means  other  than  the  issuance  of  bonds, 
under  the  bond  ordinance  upon  which  such  loan  is  predicated,  shall 
amend  or  repeal  such  ordinance  so  as  to  reduce  the  authorized 
amount  of  the  bond  issue  by  the  amount  of  the  loan  to  be  so 
retired.  Such  an  amendatory  or  repealing  ordinance  shall  take 
effect  upon  its  passage  and  need  not  be  published. 

2935.  Notes  issued  for  temporary  loans.  Negotiable  notes  shall 
be  issued  for  all  moneys  borrowed  under  the  last  two  sections. 
Such  notes  may  be  renewed  from  time  to  time  and  money  may  be 
borrowed  upon  notes  from  time  to  time  for  the  payment  of  any 
indebtedness  evidenced  thereby,  but  all  such  notes  shall  mature 
within  the  time  limited  by  said  sections  for  the  payment  of  the 
original  loan.  No  money  shall  be  borrowed  under  said  sections 
at  a  rate  of  interest  exceeding  the  maximum  rate  permitted  by 
law.  The  said  notes  may  be  disposed  of  by  public  or  private  nego- 
tiations. The  issuance  of  such  notes  shall  be  authorized  by  resolu- 
tion of  the  governing  body,  which  shall  fix  the  actual  or  maximum 
face    amount   of   the   notes    and   the    actual    or   maximum    rate    of 


APPENDIX  B 


201 


interest  to  be  paid  upon  the   amount  borrowed.     The  governing 

body  may  delegate  to  any  officer  the  power  to  fix  said  face  amount,  Delegation  of 

and  rate  of  interest  within  the  limitations  prescribed  by  said  reso-  P°wers. 

lution,    and   the   power   to   dispose   of   said   notes.     All    such   notes  Execution 

shall  be  executed  in  the  manner  provided  in  section  two  thousand  °   "°  ^^' 

nine  hundred  and  fifty-four  of  this  subchapter  in  relation  to  bonds. 

They  shall  be  submitted  to  and  approved  by  the  attorney  for  the  Approval  of 

municipality    before    they    are    issued,    and    his    written    approval  attorney. 

indorsed  on  the  notes. 


Article  26.     Permanent  Financing 

2936.  Not  applied  to  temporary  loans.  The  provisions  of  this 
article  shall  not  apply  to  temporary  loans  made  under  article 
twenty-five,   unless   otherwise   provided   in   said   article. 

2937.  For  ivhat  purposes  bonds  may  be  issued.  A  municipality 
may  issue  its  negotiable  bonds  for  any  one  or  more  of  the  following 
purposes: 

1.  For  any  purpose  or  purposes  for  which  it  may  raise  or  appro- 
priate money,  except  for  current  expenses. 

2.  To  fund  or  refund  a  debt  of  the  municipality  incurred  before 
December  fifth,  nineteen  hundred  and  twenty-one,  if  such  debt  be 
payable  at  the  time  of  the  passage  of  the  ordinance  authorizing 
bonds  to  fund  or  refund  such  debt  or  be  payable  within  one  year 
thereafter,  or  if  such  debt,  although  payable  more  than  one  year 
thereafter,  is  to  be  canceled  prior  to  its  maturity  and  simultane- 
ously with  the  issuance  of  the  bonds  to  fund  or  refund  such  debt: 
Provided,  hoiuever,  that  bonds  shall  not  be  issued  to  refund  serial 
bonds  which  mature  in  installments  as  provided  in  section  two 
thousand  nine  hundred  and  fifty-two. 

2938.  Ordinance  for  bond  issue: 

1.  Ordinance  required.  All  bonds  of  a  municipality  shall  be 
authorized  by  an  ordinance  passed  by  the  governing  body. 

2.  JVhat  ordinance  must  shoiv.    The  ordinance  shall  state: 

a.  In  brief  and  general  terms  the  purpose  for  which  the  bonds 
are  to  be  issued; 

b.  The  maximum   aggregate  principal    amount  of  the   bonds; 

c.  That  a  tax  sufficient  to  pay  the  principal  and  interest  of  the 
bonds  shall  be  annually  levied  and  collected; 

d.  That  a  statement  of  the  debt  of  the  municipality  has  been 
filed  with  the  clerk  and  is  open  to  public  inspection. 

e.  One  of  the  following  provisions: 

(1)  If  the  bonds  are  funding  or  refunding  bonds  or  for  local 
improvements  of  which  at  least  one-fourth  of  the  cost,  exclusive  of 
the  cost  of  paving  at  street  intersections,  has  been  or  is  to  be 
specially  assessed,  that  the  ordinance  shall  take  effect  upon  its 
passage,   and  shall   not  be   submitted  to  the  voters;   or 

(2)  If  the  bonds  are  for  a  purpose  other  than  the  payment  of 
necessary  expenses,  or  if  the  governing  body,  although  not  required 
to  obtain  the  assent  of  the  voters  before  issuing  the  bonds,  deems 
it  advisable  to  obtain  such  assent,  that  the  ordinance  shall  take 
effect  when  approved  by  the  voters  of  the  municipality  at  an  elec- 
tion as  provided  in  this  act;  or 

(3)  In  any  other  case,  that  the  ordinance  shall  take  effect 
thirty  days  after  its  first  publication  (or  posting)  unless  in  the 
meantime  a  petition  for  its  submission  to  the  voters  is  filed  under 


Permanent 
financing. 

Temporary 
loans  excepted. 

Purposes  of 
bond  issue. 


Current 
expenses 
barred. 

To  fund  or 
refund  debts 
heretofore 
incurred. 


Proviso: 
Serial  bonds 
not  refunded. 


Bond  issues  to 
be  ordered  by 
ordinance. 
Ordinance 
shall  state: 
Purpose  of 
issue. 
Maximum 
amount. 
Tax  for 
principal  and 
interest. 
Statement 
of  debt. 


Ordinances 
taking  effect 
on  passage. 


Ordinances 
taking  effect 
on  approval 
of  voters. 


Ordinances 
taking  effect 
thirty  days 
after 
publication. 


202 


MUNICIPAL  BONDS 


Where 

ordinances 

effective. 


Specifications 
of  contem- 
plated im- 
provements. 


Bonds  for 
unrelated 
purposes. 

Proviso: 
Bonds  for  sepa- 
rate improve- 
ments of  like 
character. 

Consolidation 
of  bond  issues. 


Bond  ordi- 
nance before 
filing  of 
petitions  for 
improvements. 


Bonds  not  is- 
sued nor  loans 
contracted 
until  petitions 
filed. 

Determination 
of  cost  of 
work. 

Bond 
ordinance 
effective  from 
passage. 

Proviso: 

Special 

assessments. 


Maturity  of 
bonds. 

Governing 
body  to  deter- 
mine and 
declare. 


this  act,  and  that  in  such  event  it  shall  take  effect  when  approved 
by  the  voters  of  the  municipality  at  an  election  as  provided  in  this 
act. 

3.  When  the  ordinance  takes  effect.  A  bond  ordinance  shall  take 
effect  at  the  time  and  upon  the  conditions  indicated  therein.  If 
the  ordinance  provides  that  it  shall  take  effect  upon  its  passage  no 
vote  of  the  people  shall  be  necessary  for  the  issuance  of  the  bonds. 

4.  Need  not  specify  location  of  improvement.  In  stating  the 
purpose  of  a  bond  issue,  a  bond  ordinance  need  not  specify  the 
location  of  any  improvement  or  property,  or  the  kind  of  pavement 
or  other  material  to  be  used  in  the  construction  or  reconstruction 
of  streets,  highways,  sidewalks,  curbs,  or  gutters,  or  the  kind  of 
construction  or  reconstruction  to  be  adopted  for  any  building,  for 
which  the  bonds  are  to  be  issued.  A  description  in  a  bond  ordi- 
nance of  a  property  or  improvement,  substantially  in  the  language 
employed  in  sections  two  thousand  nine  hundred  and  forty-two  of 
this  subchapter  to  describe  such  a  property  or  improvement,  shall 
be  a  sufficiently  definite  statement  of  the  purpose  for  which  the 
bonds  authorized  by  the  ordinance   are  to  be   issued. 

2939.  Ordinance  not  to  include  unrelated  purposes.  Bonds  for 
two  or  more  unrelated  purposes,  not  of  the  same  general  class  or 
character,  shall  not  be  authorized  by  the  same  ordinance:  Pro- 
vided, hoivever^  that  bonds  for  two  or  more  improvements  or  prop- 
erties mentioned  together  in  any  one  clause  of  subsection  four  of 
section  two  thousand  nine  hundred  and  forty-two  of  this  sub- 
chapter may  be  treated  as  being  but  for  one  purpose,  and  may  be 
authorized  by  the  same  bond  ordinance.  After  two  or  more  bond 
ordinances  have  been  passed,  the  governing  body  may,  in  its  dis- 
cretion, direct  all  or  any  of  the  bonds  authorized  by  the  ordinances 
to  be  actually  issued  as  one  consolidated  bond  issue. 

2940.  {Obsolete.) 

2941.  Ordinance  and  bond  issue;  ivhen  petition  required.  In 
cases  where  a  petition  of  property  owners  is  required  by  law  for 
the  making  of  local  improvements,  a  bond  ordinance  authorizing 
bonds  for  such  local  improvements  may  be  passed  before  any  such 
petition  is  made,  but  no  bonds  for  the  local  improvements  in  re- 
spect of  which  such  petitions  are  required  shall  be  issued  under 
the  ordinance,  nor  shall  any  temporary  loan  be  contracted  in  an- 
ticipation of  the  issuance  of  such  bonds,  unless  and  until  such 
petitions  are  made,  and  then  only  up  to  the  actual  or  estimated 
amount  of  the  cost  of  the  work  petitioned  for.  The  determination 
of  the  governing  body  as  to  the  actual  or  estimated  cost  of  work 
so  petitioned  for  shall  be  conclusive  in  any  action  involving  the 
validity  of  bonds  or  notes  or  other  indebtedness.  The  bond  ordi- 
nance may  be  made  to  take  effect  upon  its  passage,  notwithstand- 
ing that  the  necessary  petitions  for  the  local  improvements  have 
not  been  filed:  Provided,  that  it  appears  upon  the  face  of  the 
ordinance  that  one-fourth  or  some  greater  proportion  of  the  cost, 
exclusive  of  the  cost  of  work  at  street  intersections,  has  been  or 
is  to  be  assessed. 

2942.  Determining  periods  for  bonds  to  run: 

1.  Hovj  periods  estimated.  Either  in  the  bond  ordinance  or  in  a 
resolution  passed  after  the  bond  ordinance  but  before  any  bonds 
are  issued  thereunder,  the  governing  body  shall,  within  the  limits 
prescribed  by  subsection  four  of  this  section,  determine  and  de- 
clare: 


APPENDIX  B 


203 


a.  The  probable  period  of  usefulness  of  the  improvements  or 
properties  for  which  the  bonds  are  to  be  issued;   or 

b.  If  the  bonds  are  to  be  funding  or  refunding  bonds,  either  the 
shortest  period  in  which  the  debt  to  be  funded  or  refunded  can  be 
finally  paid  without  making  it  unduly  burdensome  upon  the  tax- 
payers of  the  municipality,  or,  at  the  option  of  the  governing  body, 
the  probable  unexpired  period  of  usefulness  of  the  improvement  or 
property  for  which  the  debt  was  incurred. 

2.  In  the  case  of  a  consolidated  bond  issue  comprising  bonds 
authorized  by  different  ordinances  for  different  purposes,  and  in 
the  case  of  a  bond  issue  authorized  by  but  one  ordinance  for  sev- 
eral related  purposes  in  respect  of  which  several  different  periods 
are  determined  as  aforesaid,  the  governing  body  shall  also  deter- 
mine the  average  of  the  different  periods  so  determined,  taking 
into  consideration  the  amount  of  bonds  to  be  issued  on  account  of 
each  purpose  or  item  in  respect  of  which  a  period  is  determined. 

The  period  required  to  be  determined  as  aforesaid  shall  be  com- 
puted from  a  date  not  more  than  one  year  after  the  time  of  pas- 
sage of  any  bond  ordinance  authorizing  the  issuance  of  the  bonds. 
The  determination  of  any  such  period  by  the  governing  body  shall 
be  conclusive. 

3.  Maturity  of  bonds.  The  bonds  must  mature  within  the  period 
determined  as  aforesaid,  or,  if  several  different  periods  are  so 
determined,  then  within  said  average  period. 

4.  Periods  of  usefulness.  In  determining,  for  the  purpose  of 
this  section,  the  probable  period  of  the  usefulness  of  an  improve- 
ment or  property,  the  governing  body  shall  not  deem  said  period  to 
exceed  the  following  periods  for  the  following  improvements  and 
properties,  respectively,  viz.: 

a.  Sewer  systems  (either  sanitary  or  surface  drainage),  forty 
years. 

b.  Water  supply  systems,  or  combined  water  and  electric  light 
systems,  or  combined  water,  electric  light,  and  power  systems, 
forty  years. 

c.  Gas  systems,  thirty  years. 

d.  Electric  light  and  power  systems,  separate  or  combined,  thirty 
years. 

e.  Plants  for  the  incineration  or  disposal  of  ashes,  or  garbage, 
or  refuse   (other  than  sewage),  twenty  years. 

/.  Public  parks  (including  or  not  including  a  playground,  as  a 
part  thereof,  and  any  buildings  thereon  at  the  time  of  acquisition 
thereof,  or  to  be  erected  thereon,  with  the  proceeds  of  the  bonds 
issued  for  such  public  parks),  fifty  years. 

g.  Playgrounds,   fifty  years. 

h.  Buildings  for  purposes  not  stated  in  this  section,  if  they  are: 

(1)  Of  fireproof  construction,  that  is,  a  building  the  walls  of 
which  are  constructed  tof  brick,  stone,  iron,  or  other  hard,  incom- 
bustible materials,  and  in  which  there  are  no  wood  beams  or 
lintels,  and  in  which  the  floors,  roofs,  stair  halls,  and  public  halls 
are  built  entirely  of  brick,  stone,  iron,  or  other  hard,  incombustible 
materials,  and  in  which  no  woodwork  or  other  inflammable  mate- 
rials are  used  in  any  of  the  partitions,  floorings,  or  ceiling  (but  the 
building  shall  be  deemed  to  be  of  fireproof  construction  notwith- 
standing that  elsewhere  than  in  the  stair  halls  and  entrance  halls 
there  is  wooden  flooring  on  top  of  the  fireproof  floor,  and  that 
wooden  sleepers  are  used,  and  that  it  contains  wooden  handrails 


Probable  life 
of  improve- 
ments and 
properties. 
Term  of  fund- 
ing or  refund- 
ing bonds. 

Unexpired  life 
of  improve- 
ments. 

Averages  in 
consolidated 
issues. 


Computation 
of  period. 


Determinations 
conclusive. 

Maturity  of 
bonds. 


Periods  of 
usefulness. 


Sewer  systems. 

Water,  light, 
and  power 
systems. 

Gas  systems. 

Electric  light 
and  power 
systems. 
Crematories. 

Public  parks. 


Playgrounds. 

Buildings: 
Of  fireproof 
construction. 


204 


MUNICIPAL  BONDS 


Nonfireproof 
construction. 


Of  other 
construction. 

Bridges  and 
culverts. 


Lands. 

Roads,  streets 
or  highways. 


Sand  and 
gravel. 
Waterbound 
macadam. 

Bricks,  blocks, 
asphalt,  or 
concrete. 

Lands. 


Sidewalks. 


Systems  of 
communica- 
tion. 

Fire  engines 
and  other 
vehicles. 


Land  for 
cemeteries. 

Service  mains. 


Elimination 
of  grade 
crossings. 
Other 
equipment, 
apparatus,  or 
furnishings. 
Other  improve- 
ments or 
properties. 
Properties  to 
which  periods 
are  applicable. 


Enlargements 
and  extensions. 


and  treads,  made  of  hardwood,  not  less  than  two  inches  thick), 
forty  years. 

(2)  Of  nonfireproof  construction,  that  is,  a  building  the  outer 
walls  of  which  are  constructed  of  brick,  stone,  iron,  or  other  hard, 
incombustible  materials,  but  which  in  any  other  respect  differs 
from  a  fireproof  building  as  defined  in  this  section,  thirty  years. 

(3)  Of  other  construction,  twenty  years. 

i.  Bridges  and  culverts  (including  retaining  walls  and  ap- 
proaches), forty  years,  unless  constructed  of  wood,  and  in  that 
case,   ten  years. 

;.  Lands  for  purposes  not  stated  in  this  section,  fifty  years. 

k.  Constructing  or  reconstructing  the  surface  of  roads,  streets, 
or  highways,  whether  including  or  not  including  contemporaneous 
constructing  or  reconstructing  of  sidewalks,  curbs,  gutters,  or 
drains,  and  whether  including  or  not  including  grading,  if  such 
surface: 

(1)  Is  constructed  of  sand  and  gravel,  five  years; 

(2)  Is  of  waterbound  macadam  or  penetration  process,  ten 
years; 

(3)  Is  of  bricks,  blocks,  sheet  asphalt,  bitulithic,  or  bituminous 
concrete,  laid  on  a  solid  foundation,  or  is  of  concrete,  twenty 
years. 

/.  Land  for  roads,  streets,  highways,  or  sidewalks,  or  grading, 
or  constructing  or  reconstructing  culverts,  or  retaining  walls,  or 
surface,  or  subsurface  drains,  fifty  years. 

m.  Constructing  sidewalks,  curbs,  or  gutters  of  brick,  stone, 
concrete,  or  other  material  of  similar  lasting  character,  twenty 
years. 

n.  Installing  fire  or  police  alarms,  telegraph  or  telephone  service, 
or  other  system  of  communication  for  municipal  use,  thirty  years. 
0.  Fire    engines,    fire    trucks,    hose    carts,     ambulances,     patrol 
wagons,  or  any  vehicles  for  use  in  any  departm.ent  of  the  munici- 
pality, or  for  the  use  of  municipal  officials,  ten  years. 

p.  Land  for  cemeteries,  or  the  improvement  thereof,  thirty  years, 

g.  Constructing  sewer,  water,  gas,  or  other  service  connections, 

from  the  service  main  in  the  street  to  the  curb  or  property  line, 

when  the  work  is  done  by  the  municipality  in  connection  with  any 

permanent  improvement  of  or  in  any  street,  ten  years. 

r.  The  elimination  of  any  grade  crossing  or  crossings  and  im- 
provements incident  thereto,  thirty  years. 

s.  Equipment,  apparatus,  or  furnishings  not  included  in  the 
foregoing  clauses  of  this  subsection,  ten  years. 

t.  Any  improvement  or  property  not  included  in  other  clauses  of 
this  subsection,  forty  years. 

5.  Improvements  and  properties  defined.  The  maximum  periods 
fixed  herein  for  the  improvements  and  properties  mentioned  in 
clauses  numbered  from  a  to  i,  both  inclusive,  of  subsection  4  of  this 
section  shall  be  applied  thereto  whether  such  improvements  or 
properties  are  to  be  acquired,  constructed,  reconstructed,  enlarged, 
or  extended,  in  whole  or  in  part,  and  whether  the  same  are  to 
include  or  are  not  to  include  buildings,  lands,  rights  in  lands, 
furnishings,  equipment,  machinery,  or  apparatus  constituting  a  part 
of  said  improvements  or  properties  at  the  time  of  acquisition,  con- 
struction, or  reconstruction.  If  the  improvements  of  properties 
are  to  be  an  enlargement  or  extension  of  existing  properties  or 
improvements,  the  probable  period  of  usefulness  to  be  determined 


APPENDIX  B 


205 


as  aforesaid  may  be  either  that  of  the  existing  properties  or  im- 
provements; or  that  of  the  enlargement  or  extension.  Bonds  for 
any  or  all  improvements  or  properties  included  in  any  one  clause 
of  subsection  4  above  may  for  the  purposes  of  this  section  be 
deemed  by  the  governing  body  to  be  for  but  one  improvement  or 
property. 

6.  Kind  of  construction  determined.  If  the  bonds  are  for  a 
building  referred  to  in  clause  h  of  subsection  4  above,  and  the 
bond  ordinance  does  not  state  the  kind  of  construction  of  the  build- 
ing, or  if  the  bonds  are  for  street  improvements  mentioned  in 
clause  k  of  subsection  4  above,  and  the  bond  ordinance  does  not 
state  the  kind  or  kinds  of  pavement  or  other  material  to  be  used, 
then  the  kind  of  construction,  or  the  kind  or  kinds  of  pavement  or 
other  material,  as  the  case  may  be,  shall  be  determined  by  resolu- 
tion before   any  of  the  bonds   are   issued. 

7.  Shortest  period  of  payment.  In  determining,  for  the  purpose 
of  this  section,  the  shortest  period  in  which  a  debt  to  be  funded 
or  refunded  hereunder  can  be  finally  paid  without  making  it 
unduly  burdensome  upon  the  taxpayers  of  the  municipality,  the 
governing  body  shall  not  deem  said  period  to  be  greater  than  the 
following  periods   in  the   following  cases,   respectively: 

a.  Thirty  years,  if  funding  bonds  are  to  be  issued. 

b.  Thirty  years,  if  refunding  bonds  are  to  be  issued,  and  the  net 
debt  of  the  municipality,  as  stated  in  the  debt  statement  filed 
pursuant  to  section  two  thousand  nine  hundred  and  forty-three,  is 
not  more  than  four  per  centum  of  the  assessed  valuation  set  forth 
in  said  statement. 

c.  Forty  years,  if  refunding  bonds  are  to  be  issued,  and  said 
net  debt  is  more  than  four  but  not  more  than  five  per  centum  of 
said  assessed  valuation. 

d.  Fifty  years,  if  refunding  bonds  are  to  be  issued,  and  said  net 
debt  is  more  than  five  per  centum  of  said  assessed  valuation. 

2943.  Sworn  statement  of  indebtedness: 

1.  What  shall  be  shovjn.  After  the  introduction  and  before  the 
final  passage  of  a  bond  ordinance  an  officer  designated  by  the 
governing  body  for  that  purpose  shall  file  with  the  clerk  a  state- 
ment showing  the  following: 

{a)  The  gross  debt  (which  shall  not  include  debt  incurred  or  to 
be  incurred  in  anticipation  of  the  collection  of  taxes  or  in  anticipa- 
tion of  the  sale  of  bonds  other  than  funding  and  refunding  bonds), 
which  gross  debt  shall  be  as  follows: 

(1)  Outstanding  debt  incurred  before  December  sixth,  one  thou- 
sand nine  hundred  and  twenty-one,  not  evidenced  by  bonds. 

(2)  Outstanding  bonded   debts. 

(3)  Bonded  debt  to  be  incurred  under  ordinances  passed  or 
introduced. 

{b)  The  deductions  to  be  made  from  gross  debt  in  computing 
net  debt,  which  deductions  shall  be  as  follows: 

(1)  Amount  of  unissued  funding  or  refunding  bonds  included 
in  gross  debt. 

(2)  Amount  of  sinking  funds  or  other  funds  held  for  the  pay- 
ment of  any  part  of  the  gross  debt  other  than  debt  incurred  for 
water,  gas,  electric  light,  or  power  purposes  or  two  or  more  of 
said  purposes. 

(3)  The  amount  of  uncollected  special  assessments  theretofore 
levied  on  account  of  local  improvements  for  which  any  part  of  the 


Bonds  for 
improvements 
of  like 
classification. 


Determination 
of  classifica- 
tion. 


Determination 
of  shortest 
period  of 
payment. 


Thirty  years. 
Thirty  years. 


Forty  years. 


Fifty  years. 


Statements  to 
be  filed  before 
passage  of 
ordinance. 


Gross  debt. 


Outstanding 
floating  debt. 

Outstanding 
bond  debt. 
Bonded  debt  to 
be  incurred. 

Deductions. 


Unissued  fund' 
ing  bonds. 

Amount  of 
sinking  fund 
or  other  funds. 


Uncollected 

apecial 

assessments. 


206 


MUNICIPAL  BONDS 


Amount  of 
special  assess- 
ments to  be 
levied. 


Bonded  debt 
for  water,  gas, 
light,  and 
power  systems. 
Net  debt. 

Assessed 
valuation  of 
property. 
Percentage. 

Limitation. 


Statements 
filed  for 
inspection. 
Statements 
deemed  true. 


Impeac'iment 
of  statements. 


Publication 
of  bond 
ordinance. 
Form  of 
notice. 


gross  debt  was  or  is  to  be  incurred  which  will  be  applied  when 
collected  to  the  payment  of  any  part  of  the  gross  debt. 

(4)  The  amount,  as  estimated  by  the  engineer  of  the  munici- 
pality or  officer  designated  for  that  purpose  by  the  governing  body 
or  by  the  governing  body  itself,  of  special  assessments  to  be  levied 
on  account  of  local  improvements  for  which  any  part  of  the  gross 
debt  was  or  is  to  be  incurred,  and  which,  when  collected,  will  be 
applied  to  the  payment  of  any  part  of  the  gross  debt. 

(5)  The  amount  of  bonded  debt  included  in  the  gross  debt  and 
incurred,  or  to  be  incurred,  for  water,  gas,  electric  light  or  power 
purposes,  or  two  or  more  of  said  purposes. 

{c)  The  net  debt,  being  the  difference  between  the  gross  debt 
and  the  deductions. 

(d)  The  assessed  valuation  of  property  as  last  fixed  for  munici- 
pal taxation. 

{e)  The  percentage  that  the  net  debt  bears  to  said  assessed 
valuation. 

2.  Limitations  upon  passage  of  ordinance.  The  ordinance  shall 
not  be  passed  unless  it  appears  from  said  statement  that  the  said 
net  debt  does  not  exceed  eight  (8)  per  cent  of  said  assessed  valua- 
tion, unless  the  bonds  to  be  issued  under  the  ordinance  are  to  be 
funding  or  refunding  bonds,  or  are  bonds  for  water,  gas,  electric 
light  or  power  purposes,  or  two  or  more  of  said  purposes. 

3.  Statement  filed  for  inspection.  Such  statements  shall  remain 
on  file  with  the  clerk  and  be  open  to  public  inspection.  In  any 
action  or  proceeding  in  any  court  involving  the  validity  of  bonds, 
said  statement  shall  be  deemed  to  be  true  and  to  comply  with  the 
provisions  of  this  act,  unless  it  appears  (in  an  action  or  proceed- 
ing commenced  within  the  time  limited  by  section  2945  for  the 
commencement  thereof),  first,  that  the  representations  contained 
therein  could  not  by  any  reasonable  method  of  computation  be 
true;  and  second,  that  a  true  statement  would  show  that  the  ordi- 
nance authorizing  the  bonds  could  not  be  passed. 

2944.  Publication  of  bond  ordinance.  A  bond  ordinance  shall  be 
published  once  in  each  of  two  successive  weeks  after  its  final 
passage.  A  notice  substantially  in  the  following  form  (the  blanks 
being  first  properly  filled  in),  with  the  printed  or  written  signature 
of  the  clerk  appended  thereto,  shall  be  published  with  the  ordi- 
nance : 


The  foregoing  ordinance  was  passed  on  the.  . .  .day  of , 

19....,  and  was  first  published   (or  posted),  on  the day  of 

,   19.... 

Any  action  or  proceeding  questioning  the  validity  of  said  ordi- 
nance must  be  commenced  within  thirty'  days  after  its  first  publi- 
cation   (or  posting). 


Clerk   {or  Secretary). 


Limitation  of  2945.  Limitation  of  action  to  set  aside  ordinance.     Any  action  or 

action.  proceeding  in  any  court  to  set  aside  a  bond  ordinance,  or  to  obtain 

any  other  relief  upon  the  ground  that  the  ordinance  is  invalid, 
must  be  commenced  within  thirty  days  after  the  first  publication 
of  the  notice  aforesaid  and  the  ordinance  or  supposed  ordinance 
Actions  barred^  referred  to  in  the  notice.  After  the  expiration  of  such  period  of 
limitation,   no   right   of   action   or   defense   founded   upon   the   in- 


APPENDIX  B  207 

validity  of  the  ordinance  shall  be  asserted,  nor  shall  the  validity 
of  the  ordinance  be  open  to  question  in  any  court  upon  any  ground 
whatever,  except  in  an  action  or  proceeding  commenced  within 
such  period. 

2946.  {Obsolete.) 

2947.  Ordinance  requiring  popular  vote: 

1.  Petition  filed.     A   petition   demanding  that  a   bond  ordinance    Petition  for 
be  submitted  to  the  voters  may  be  filed  with  the  clerk  within  thirty    election, 
days    after    the   first   publication    of   the    ordinance.      The    petition    Specification 
shall  be  in  writing  and  signed  by  voters  of  the  municipality  equal    mgnls""^^' 
in  number  to  at  least  twenty-five  per  centum  of  the  total  number 
of  registered  voters  in  the  municipality  as  shown  by  the  registra- 
tion  books   for   the   last   preceding   election   for   municipal    officers 
therein.     The   residence   address   of  each   signer   shall   be   written 
after  his  signature.     Each  signature  to  the  petition  shall  be  veri-   Verification  of 
fied  by  a   statement    (which  may   relate   to   a   specified   number   of   signatures, 
signatures),  made  by  some  adult  resident  freeholder  of  the  munici- 
pality, under  oath  before  an  officer  competent  to  administer  oaths, 
to  the  effect  that  the  signature  was  made  in  his  presence  and  is 
the  genuine  signature  of  the  person  whose  name  it  purports  to  be. 

The  petition  need  not  contain  the  text  of  the  ordinance  to  which    Need  not  con- 

r  rx^i  •  •  1  I  II  1  IT  tain  text. 

It  rerers.      1  he  petition   need   not  be   all   on  one   sheet,    and   if  on    Separate 

more  than  one  sheet,  it  shall  be  verified  as  to  each  sheet.  sheets. 

3.  Sufficiency  of  petitions.     The  clerk  shall  investigate  the  suffi-  Clerk  to 

ciency  of  the  petition  and  present  it  to  the  governing  body  with  a  suffidency^of 

certificate   stating  the   result  of  his   investigation.     The   governing  petition. 

body  shall  thereupon  determine  the  sufficiency  of  the  petition   and  Determination 

the  determination  of  the  governing  body  shall  be  conclusive. 

2948.  Elections  on  bond  issue: 

1.  IVhat  majority  required.     If  a  bond  ordinance   provides   for    Majority  of 
the   issuance   of  bonds   for   a   purpose   other   than   the   payment   of    registered 
necessary  expenses  of  the  municipality,  the  approval  of  a  majority 

of  the  qualified  voters  of  the  municipality,  as  required  by  the 
Constitution  of  North  Carolina,  shall  be  necessary  in  order  to  Majority  of 
make  the  ordinance  operative.  If,  however,  the  bonds  are  to  be  votes  cast, 
issued  for  necessary  expenses,  the  affirmative  vote  of  the  majority 
of  the  voters  voting  on  the  bond  ordinance  shall  be  sufficient  to 
make  it  operative,  in  all  cases  where  the  ordinance  is  required  by 
this  act  to  be  submitted  to  the  voters. 

2.  When  election  held.     Whenever  the  taking  effect  of  an  ordi-   Time  for 
nance    authorizing  the   issuance   of   bonds    is   dependent   upon   the   election, 
approval   of  the   ordinance   by   the   voters   of   a   municipality,   the 
governing  body  may  submit  the  ordinance  to  the  voters  at  an  elec- 
tion to  be  held  not  more  than  six  months  after  the  passage  of  the 
ordinance.     The  governing  body  may  call   a   special   election   for    Special 
that   purpose   or   may   submit  the   ordinance   to   the   voters   at   the   elections, 
regular  municipal  election  next  succeeding  the  passage  of  the  ordi-    Limitations, 
nance,  but  no  such  special  election  shall  be  held  within  one  month 

before  or   after   a   regular   election.      Several    ordinances   or   other  Separate  mat- 
matters  may  be  voted  upon  at  the  same  election.  ters  voted  on. 

3.  Ne<w  registration.    The  governing  body  of  the  city  or  town  in  New  registra- 
which  such  election  is  held  may,  in  their  discretion,  order  a  new  tion- 
registration  of  the  voters  for  such  election.     The  books  for   such 

new  registration  shall  remain  open  in  each  precinct  from  nine  a.m.   Time  of 
to  six  p.  m.  on  each  day,  except  Sundays  and  holidays,  for  three 
weeks,  beginning  on  a  Monday  morning  and  ending  on  the  second 


208 


MUNICIPAL  BONDS 


Election 
officers. 

Proviso: 
Registration  ori 
Saturdays. 
Sufficiency  of 
notice. 


Change  of 
register. 


Notice  of 
election. 


Statements  to 
be  made. 


Ballots. 


Return  of 

votes. 


Canvass  of 
returns. 


Application  of 
general  law. 


Certificate 

of  result. 


Record  of 
certificate. 
Original  filed. 

Limitation  of 
actions  as  to 
election. 


Proviso: 

towns 

excepted. 


Saturday  evening  before  the  election.  A  registrar  and  two  judges 
of  election  shall  be  appointed  by  the  governing  body  for  each  pre- 
cinct: Provided,  that  the  books  shall  be  open  at  the  polling  places 
on  each  Saturday  during  the  registration  period.  Sufficient  notice 
shall  be  deemed  to  have  been  given  of  such  new  registration  and 
of  the  appointment  of  the  election  officers  if  a  notice  thereof  be 
published  at  least  thirty  (30)  days  before  the  closing  of  the  regis- 
tration books,  stating  the  hours  and  days  for  registration.  It 
shall  not  be  necessary  to  specify  in  said  notice  the  places  for 
registration.  In  case  the  registrar  shall  fail  or  refuse  for  any 
cause  to  perform  his  duties,  it  shall  be  lawful  for  the  clerk  to 
appoint  another  person  to  perform  such  duties,  and  no  notice  of 
such  appointment  shall  be  necessary. 

4.  Notice  of  election.  A  notice  of  the  election  shall  be  deemed 
sufficiently  published  if  published  once  not  later  than  twenty  days 
before  the  election.  Such  notice  shall  state  the  maximum  amount 
of  the  proposed  bonds  and  the  purpose  thereof,  and  the  fact  that 
a  tax  will  be  levied  for  the  payment  thereof.  The  date  of  the 
election  shall  be  stated  therein, 

5.  Ballots.  A  ballot  or  ballots  shall  be  furnished  to  each  quali- 
fied voter   at  said  election,  which  ballots  may  contain   the  words 

"for  the  ordinance  authorizing  $ bonds   (briefly  stating 

the    purpose),    and    a   tax   therefor,"    and    "against    the    ordinance 

authorizing  $ bonds  (briefly  stating  the  purpose),  and  a 

tax  therefor,"  and  if  one  ballot  contains  the  two  alternatives  it 
may  contain  squares  in  one  of  which  the  voter  may  make  a  (X) 
mark,  but  this  form  of  ballot  is  not  prescribed. 

6.  Returns  canvassed.  The  officers  appointed  to  hold  the  elec- 
tion in  making  return  of  the  result  thereof,  shall  incorporate 
therein  not  only  the  number  of  votes  cast  for  and  against  each 
ordinance  submitted,  but  also  the  number  of  voters  registered  and 
qualified  to  vote  in  the  election.  The  governing  body  shall  canvass 
the  returns,  and  shall  include  in  their  canvass  the  votes  cast  and 
the  number  of  voters  registered  and  qualified  to  vote  in  the  elec- 
tion, and  shall  judicially  determine  and  declare  the  result  of  the 
election. 

7.  Application  of  other  Imvs.  Except  as  herein  otherwise  pro- 
vided, the  registration  and  election  shall  be  conducted  in  accord- 
ance with  the  laws  then  governing  elections  for  municipal  officers 
in  such  municipality,  and  governing  the  registration  of  the  electors 
for  such  election  of  officers. 

8.  Statement  of  result.  The  board  shall  prepare  a  statement 
showing  the  number  of  votes  cast  for  and  against  each  ordinance 
submitted,  and  the  number  of  voters  qualified  to  vote  in  the  elec- 
tion, and  declaring  the  result  of  the  election,  which  statement  shall 
be  signed  by  a  majority  of  the  members  of  the  board  and  delivered 
to  the  clerk  of  the  municipality,  who  shall  record  it  in  the  book 
of  ordinances  of  the  municipality  and  file  the  original  in  his  office 
and  publish  it  once. 

9.  Limitation  as  to  actions.  No  right  of  action  or  defense 
founded  upon  the  invalidity  of  the  election  shall  be  asserted,  nor 
shall  the  validity  of  the  election  be  open  to  question  in  any  court 
upon  any  ground  whatever,  except  in  an  action  or  proceeding  com- 
menced within  thirty  days  after  the  publication  of  such  statement: 
Provided,  that  sections  2947  and  2948  shall  not  apply  to  the  in- 
corporated towns  of  Madison  County. 


APPENDIX  B 


209 


2949.  Preparation  for  issuing  bonds.  At  any  time  after  the 
passage  of  a  bond  ordinance,  all  steps  preliminary  to  the  actual 
issuance  of  bonds  under  the  ordinance  may  be  taken,  but  the 
bonds  shall  not  be  actually  issued  unless  and  until  the  ordinance 
takes  effect. 

2950.  Within  nuhat  time  bonds  issued.  After  a  bond  ordinance 
takes  effect,  bonds  may  be  issued  in  conformity  with  its  provi- 
sions at  any  time  within  three  years  after  the  ordinance  takes 
effect,  unless  the  ordinance  shall  have  been  repealed,  which  repeal 
is  permitted  (without  the  privilege  of  referendum  upon  the  ques- 
tion of  appeal),  unless  notes  shall  have  been  issued  on  anticipation 
of  the  receipts  of  the  proceeds  of  the  bonds  and  shall  be  out- 
standing. 

2951.  Amount  and  nature  of  bonds  determined.  The  aggregate 
amount  of  bonds  to  be  issued  under  a  bond  ordinance,  the  rate  or 
rates  of  interest  they  shall  bear,  not  exceeding  six  per  centum  per 
annum,  payable  semi-annually,  and  the  times  and  place  or  places 
of  payment  of  the  principal  and  interest  of  the  bonds,  shall  be 
fixed  by  resolution  or  resolutions  of  the  governing  body.  The 
bonds  may  be  issued  either  all  at  one  time  or  from  time  to  time 
in  blocks,  and  different  provisions  may  be  made  for  different 
blocks. 

2952.  Bonded  debt  payable  in  installments.  Each  bond  issue 
made  under  this  act  shall  mature  in  annual  installments  or  series, 
the  first  of  which  shall  be  made  payable  not  more  than  three  years 
after  the  date  of  the  first  issued  bonds  of  such  issue,  and  the  last 
within  the  period  determined  and  declared  pursuant  to  section 
two  thousand  nine  hundred  and  forty-two  of  this  subchapter.  No 
such  installment  or  series  shall  be  more  than  two  and  one-half 
times  as  great  in  amount  as  the  smallest  prior  installment  or 
series  of  the  same  bond  issue.  If  all  of  the  bonds  of  an  issue  are 
not  issued  at  the  same  time,  the  bonds  at  any  one  time  outstanding 
shall  mature  as  aforesaid. 

2953.  Medium  and  place  of  payment.  The  bonds  may  be  made 
payable  in  such  kinds  of  money  and  at  such  place  or  places  within 
or  without  the  State  of  North  Carolina  as  the  governing  body  may 
by  resolution  provide. 

2954.  Formal  execution  of  bonds.  The  bonds  shall  be  issued  in 
such  form  as  the  officers  who  execute  them  shall  adopt,  except  as 
otherwise  provided  by  the  governing  body.  They  shall  be  signed 
by  two  or  more  officers  designated  by  the  governing  body,  or,  if 
the  governing  body  makes  no  such  designation,  then  by  the  mayor 
or  other  chief  executive  officer  and  by  the  clerk,  and  the  corporate 
seal  of  the  municipality  shall  be  affixed  to  the  bonds.  The  bonds 
may  have  coupons  attached  for  the  interest  to  be  paid  thereon, 
which  coupons  shall  bear  a  facsimile  signature  of  the  clerk  in 
office,  at  the  date  of  the  bonds  or  at  the  date  of  delivery  thereof. 
The  delivery  of  bonds  so  executed  shall  be  valid  notwithstanding 
any  change  in  the  officers  or  in  the  seal  of  the  municipality  occur- 
ring after  the  signing  and  sealing  of  the  bonds. 

2955.  Registration  and  transfer  of  bonds: 

1.  Bonds  payable  to  bearer.  Bonds  issued  under  this  act  shall 
be  payable  to  the  bearer  unless  they  are  registered  as  provided  in 
this  section;  and  each  coupon  appertaining  to  a  bond  shall  be 
payable  to  the  bearer  of  the  coupon. 


Preparation 
for  bond  issue. 


Time  for  issu- 
ance of  bonds. 


Repeal  of 
ordinance. 

Notes  barring 
repeal. 


Determination 
of  terms  of 
bonds. 


Honds  payable 
in  install- 
ments. 
Times  of 
maturity. 


Proportion  of 
installments. 


Bonds  issued 
at  intervals. 


Medium  and 
place  of 
payment. 


Form  of 
bonds. 

Execution. 


Coupons. 


Delivery. 


Bonds  and  cou- 
pons payable 
to  bearer. 


210 


MUNICIPAL  BONDS 


Registration 
or  transfer 
agent. 

Bonds 
registered  at 
request  of 
owner. 

Payable  to  reg- 
istered owner. 


Transfer  of 

registered 

bonds. 


Registration 
and  transfer 
noted  on 
bonds. 

Coupons  can- 
celed on  regis- 
tration of 
bonds. 
Recital  of 
agreement  in 
bonds. 


Sale  below  par 
forbidden. 


Advertisement 
of  sale. 


Guaranty  of 
bids. 


Publication 
of  notice. 


Determination 
as  to  financial 
or  trade 
journal. 

Bids  opened. 

Awarded. 

Delegation  of 
powers. 


2.  Registration  and  effect.  A  municipality  may  keep  in  the 
office  of  its  financial  officer  or  in  the  office  of  a  bank  or  trust  com- 
pany appointed  by  the  governing  body  as  bond  registrar  or  transfer 
agent,  a  register  or  registers  for  the  registration  and  transfer  of 
its  bonds,  in  which  it  may  register  any  bond  at  the  time  of  its 
issue,  or,  at  the  request  of  the  holder,  thereafter.  After  such 
registration  the  principal  and  interest  of  the  bond  shall  be  payable 
to  the  person  in  whose  name  it  is  registered  except  in  the  case  of 
a  coupon  bond  registered  as  to  principal  only,  in  which  case  the 
principal  shall  be  payable  to  such  person,  unless  the  bond  shall 
be  discharged  from  registry  by  being  registered  as  payable  to 
bearer.  After  registration  a  bond  may  be  transferred  on  such 
register  by  the  registered  owner  in  person  or  by  attorney,  upon 
presentation  to  the  bond  registrar,  accompanied  by  delivery  of  a 
written  instrument  of  transfer  in  a  form  approved  by  the  bond 
registrar,  executed   by  the  registered  owner. 

3.  Registration  and  transfer  noted  on  bond.  Upon  the  registra- 
tion or  transfer  of  a  bond  as  aforesaid,  the  bond  registrar  shall 
note  such  registration  or  transfer  on  the  back  of  the  bond.  Upon 
the  registration  of  a  coupon  bond  as  to  both  principal  and  interest 
he  shall  also  cut  off  and  cancel  the  coupons. 

4.  Agreement  for  registration.  A  municipality  may,  by  recital 
in  its  bonds,  agree  to  register  the  bonds  as  to  principal  only,  or 
agree  to  register  them  either  as  to  principal  only  or  as  to  both 
principal  and  interest  at  the  option  of  the  bondholder. 

2956.  5"^/^  of  bonds.  All  bonds  of  a  municipality  shall  be  sold 
at  not  less  than  par.  They  shall  be  advertised  and  sold  upon 
sealed  proposals,  or  at  public  auction,  unless  the  sale  is  made 
within  thirty  days  after  failure  to  receive  any  legally  acceptable 
bid  in  response  to  a  public  offering  made  as  provided  in  this 
section. 

Whenever  bonds  are  to  be  sold  pursuant  to  advertisement,  there 
shall  be  published,  at  least  once,  a  notice  containing  a  description 
of  the  bonds  to  be  sold,  the  place  of  sale,  and  the  time  of  sale,  or 
time  limited  for  the  receipt  of  proposals,  which,  shall  be  not  less 
than  ten  days  after  the  first  publication  of  the  notice.  The  notice 
shall  state  that  bidders  must  present  with  their  bids  a  certified 
check  upon  an  incorporated  bank  or  trust  company,  payable  to  the 
order  of  the  municipality  or  of  an  executive,  financial  or  clerical 
officer  thereof,  or  a  sum  of  money  for  or  in  an  amount  equal  to 
two  (2)  per  centum  of  the  face  amount  of  bonds  bid  for,  to  secure 
the  municipality  against  any  loss  resulting  from  a  failure  of  the 
bidder  to  comply  with  the  terms  of  his  bid.  The  said  notice  shall 
be  published  not  only  In  the  manner  prescribed  by  section  two 
thousand  nine  hundred  and  twenty,  but  also  at  least  ten  days 
before  the  expiration  of  the  time  limited  for  the  receipt  of  bids,  in 
a  financial  paper  or  trade  journal  published  within  the  State  of 
North  Carolina,  which  publishes  from  time  to  time  notices  of  the 
sale  of  municipal  bonds;  and  the  determination  of  the  governing 
body  that  the  paper  or  journal  named  for  said  publication  is  such 
financial  paper  or  trade  journal,  and  that  It  publishes  from  time 
to  time  notices  of  the  sale  of  municipal  bonds  shall  be  conclusive. 

Proposals  submitted  pursuant  to  such  notices  shall  be  opened 
in  public  and  the  bonds  shall  be  awarded  to  the  highest  bidder, 
unless  all  bids  are  rejected.  The  governing  body  may  delegate 
the  power  to  sell  bonds  to   a  committee  thereof,  or  any  two  offi- 


APPENDIX  B  211 

cers,  but  every  private  sale  of  bonds  shall  be  made  or  confirmed  Confirmation 

by  the  governing  body.     Bonds  of  the  municipality  sold  out  of   a  O' sales, 

sinking  fund  of  a  municipality  shall  be  sold   as  provided  in  this  Sales  out  of 

section,  except  that  such  bonds  may  be  sold  for  less  than  par.  sinking  fund. 

Nothing  herein  shall  prevent  a  municipality  from   awarding  its  Sales  at  lowest 

bonds   to  the   bidder  offering  to   take   them    at   the    lowest   rate   of  interest, 
interest,  provided  the  notice  of  sale  invites  bidders  to  name  rate 
of  interest  which  the  bonds  are  to  bear. 

2957.  Application  of  funds.     The  proceeds  of  the  sale  of  bonds  Application  of 
under  this  act  shall  be  used  only  for  the  purposes  specified  in  the  Proceeds, 
ordinance    authorizing    said    bonds,    and    for    the    payment    of    the 

principal  and  interest  of  temporary  loans  made  in  anticipation  of 

the  sale  of  bonds:    Provided,  hoivever,  that  if  for  any  reason  any    Proviso:  Bal- 

part  of  such  proceeds  are  not  applied  to  or  are  not  necessary  for   ^."'^^  *°,P"'''. 

,  ^  ,  jj.i:.u  juiiL      chase  of  bonds, 

such    purposes,    such    unexpended    part   of    the    proceeds    shall    be 

applied  to  the  payment  of  the  principal  or  interest  of  said  bonds. 

The    cost    of    preparing,    issuing,    and    marketing    bonds    shall    be  Costofprepa- 

deemed  to  be  one  of  the  purposes  for  which  the  bonds  are  issued,  ^nj  marketing 

2958.  Bonds  incontestable  after  delivery.  Any  bonds  reciting  Bonds  incon- 
that  they  are  issued  pursuant  to  this  act  shall  in  any  action  or  testable  after 
proceeding  involving  their  validity  be  conclusively  deemed  to  be 

fully  authorized  by  this  act,  and  to  have  been  issued,  sold,  exe- 
cuted, and  delivered  in  conformity  herewith,  and  with  all  other 
provisions  of  statutes  applicable  thereto,  and  shall  be  incontest- 
able, anything  herein  or  in  other  statutes  to  the  contrary  not- 
withstanding, unless  such  action  or  proceeding  is  begun  prior  to 
the  delivery  of  such  bonds. 

2959.  Taxes  levied  for  payment  of  bonds.     The  full   faith  and    Faith  and 

credit  of  the  municipality  shall  be  deemed  to  be  pledged  for  the    "s'l't  pledged 

1  /    .  •      •      I      1-         J    •  r        o  for  payment, 

punctual  payment  or  the  principal  or  and  interest  on  every  bond 

and   note    issued    under    this    act,    including    assessment    bonds    or 
other  bonds  for  which  special   funds   are  provided.     The  govern-    Taxes, 
ing  body  shall  annually  levy  and  collect  a  tax  ad  valorem  upon 
all  the  taxable   property  in  the  municipality  sufficient  to   pay  the 
principal   and  interest  of  all  bonds  issued  under  this  act  as  such 
principal   and   interest  become   due:    Provided,  hoivever,  that  such    Proviso:   Re- 
tax  may  be  reduced  by  the  amount  of  other  moneys  appropriated    Auction  of  tax. 
and  actually  available  for  such  purpose. 

So  much  of  the  net  revenue  derived  by  the  municipality  in  any    Application  of 
fiscal   year  from   the   operation   of   any   revenue   producing   enter-    revenue  from 
J     ,        ^,  •    •       1-^        r^  •  11  f    bonded  enter- 

prise   owned    by    the    municipality    arter    paying    all    expenses    of    prises. 

operating,  managing,  maintaining,  repairing,  enlarging,  and  ex- 
tending such  enterprise,  shall  be  applied,  first  to  the  payment  of 
the  interest,  payable  in  the  next  succeeding  year  on  bonds  issued 
for  such  enterprise,  and  next,  to  the  payment  of  the  amount 
necessary  to  be  raised  by  tax  in  such  succeeding  year  for  the  pay- 
ment of  the  principal  of  said  bonds.  All  money  derived  from  the  Application  of 
collection  of  special  assessments  for  local  improvements  for  which  special  assess- 
bonds  or  notes  were  issued  shall  be  placed  in  a  special  fund  and 
used  only  for  the  payment  of  bonds  or  notes  issued  for  the  same 
or  other  local  improvements. 

Every    municipality    shall    have    the    power    to    levy    taxes    ad    Power  to  levy 
valorem    upon    all    taxable    property    therein    for    the    purpose    of    ***^^- 
paying  the  principal  of  or  the  interest  on  any  bonds  or  notes  for 
the    payment    of   which    the    municipality    is    liable,    issued    under 
any   act  other  than   this  act,   or   for   the   purpose   of  providing   a 


212 


MUNICIPAL  BONDS 


Taxes  for  pay- 
ment of  bonds 
not  subject  to 
limitations. 

Levy  and 
collection  of 
taxes. 


sinking  fund  for  the  payment  of  said  principal,  or  for  the  purpose 
of  paying  the  principal  of  or  interest  on  any  notes  issued  under 
this  act. 

The  powers  stated  in  this  section  in  respect  of  the  levy  of  taxes 
for  the  payment  of  the  principal  and  interest  of  bonds  and  notes 
shall  not  be  subject  to  any  limitation  prescribed  by  law  upon  the 
amount  or  rate  of  taxes  which  a  municipality  may  levy.  Taxes 
levied  under  this  section  shall  be  levied  and  collected  in  the  same 
manner  as  other  taxes  are  levied  and  collected  upon  property  in 
the  municipality. 


Restrictions  oil 
powers  as  to: 


Appropria- 
tions. 

Incurring 
debt. 

Expenditures. 


Ejitrance  into 
contracts. 


Authorization 
of  bond  issue 
and  appro- 
priation. 

Passage  of 
ordinances  and 
resolutions. 


Proviso: 
Approval  of 
acts  and 
ordinances. 


Enforcement 
of  orders  of 
court. 


Article  27.    Restrictions  Upon  the  Exercise  of  Municipal 
Powers. 

2960.  In  borrowing  or  expending  money: 

1.  No  municipality  shall: 

a.  Make  an  appropriation  of  money  except  as  provided  in  this 
act; 

b.  Borrow  money  or  issue  bonds  or  notes  except  as  provided  in 
this  act; 

c.  Make  an  expenditure  of  money  unless  the  money  shall  have 
been  appropriated  as  provided  in  this  act,  or  unless  the  expendi- 
ture is  a  payment  of  a  judgment  against  the  municipality  or  is  a 
payment  of  the  principal  or  interest  of  a  bond  or  note  of  the 
municipality;  or, 

d.  Enter  into  any  contract  involving  the  expenditure  of  money 
unless  a  sufficient  appropriation  shall  have  been  made  therefor, 
except  a  continuing  contract  to  be  performed  in  whole  or  in  part 
in  an  ensuing  fiscal  year,  in  which  case  an  appropriation  shall  be 
made  sufficient  to  meet  the  amount  to  be  paid  in  the  fiscal  year 
in  which  the  contract  is  made. 

2.  The  authorization  of  bonds  by  a  municipality  shall  be  deemed 
to  be  an  appropriation  of  the  maximum  authorized  amount  of  the 
bonds  for  the  purposes  for  which  they  are  to  be  issued. 

2961.  Manner  of  passing  ordinances  and  resolutions.  Ordinances 
and  resolutions  passed  pursuant  to  this  act  shall  be  passed  in  the 
manner  provided  by  other  laws  for  the  passage  of  ordinances  and 
resolutions,  but  shall  not  be  subject  to  the  provisions  of  other 
laws  prescribing  conditions,  acts,  or  things  necessary  to  exist, 
happen,  or  be  performed  precedent  to  or  after  the  passage  of 
ordinances  or  resolutions  in  order  to  give  them  full  force  and 
effect:  Provided,  hoivever,  that  in  any  municipality  in  which  the 
acts  of  the  governing  body  thereof  involving  the  raising  or  ex- 
penditure of  money  are  required  by  law  to  be  approved  by  some 
other  official  board  or  officer  of  the  municipality  in  order  to  make 
them  effective,  all  ordinances  and  resolutions  passed  by  the  gov- 
erning body  under  this  act  shall,  unless  they  relate  solely  to 
elections  held  under  this  act,  be  so  approved  before  they  take 
effect. 

2962.  Enforcement  of  act.  If  any  board  or  officer  of  a  munici- 
pality shall  be  ordered  by  a  court  of  competent  jurisdiction  to 
levy  or  collect  a  tax  to  pay  a  judgment  or  other  debt,  or  to  per- 
form any  duty  required  by  this  act  to  be  performed  by  such  board 
or  officer,  and  shall  fail  to  carry  out  such  order,  the  court,  in  addi- 
tion to  all  other  remedies,  may  appoint  its  own  officers  or  other 
persons  to  carry  out  such  order. 


APPENDIX  B 


213 


2963.  Limitation  of  tax  for  general  purposes.  For  the  purpose 
of  raising  revenue  for  defraying  the  expenses  incident  to  the 
proper  government  of  the  municipality,  the  governing  body  shall 
have  the  power  and  it  is  hereby  authorized  to  levy  and  collect  an 
annual  ad  valorem  tax  on  all  taxable  property  in  the  munici- 
pality at  a  rate  not  exceeding  one  dollar  on  the  one  hundred 
dollars  valuation  of  said  property,  notwithstanding  any  other 
law,  general  or  special,  heretofore  or  hereafter  enacted,  except 
a  law  hereafter  enacted  expressly  repealing  or  amending  this  sec- 
tion: Provided,  that  in  cities  where  the  taxable  values  for  the 
year  1920  amounted  to  one  hundred  million  dollars  or  more,  the 
rate  of  taxation  for  general  purposes  shall  not  exceed  sixty-five 
(65)  cents  on  the  one  hundred  dollars  valuation. 

2964.  Certain  taxes  validated.  All  taxes  levied  by  any  munici- 
pality after  the  enactment  of  chapter  one  hundred  and  thirty- 
eight  of  public  laws  of  one  thousand  nine  hundred  and  seventeen, 
and  prior  to  December  sixth,  one  thousand  nine  hundred  and 
twentj'-one,  are  hereby  ratified  and  validated,  notwithstanding 
the  rate  of  said  taxes  exceeded  the  maximum  rate  prescribed  by 
law,  or  any  other  defect  or  irregularity  in  the  levy  thereof. 

2965.  Outstanding  floating  debt  validated,  and  may  be  funded. 
All  floating  or  other  indebtedness,  not  evidenced  by  bonds,  which 
was  outstanding  on  December  sixth,  one  thousand  nine  hundred 
and  twenty-one,  and  was  incurred  by  a  municipality  in  good 
faith  for  necessary  expenses  thereof  (including  floating  or  other 
indebtedness  incurred  in  anticipation  of  the  collection  of  taxes 
or  for  current  expenses)  is  hereby  validated,  notwithstanding 
any  want  of  power  or  authority  to  incur  indebtedness  for  the 
purpose  for  which  such  indebtedness  was  incurred,  and  notwith- 
standing any  defect  in  the  procedure  for  incurring  indebtedness, 
or  any  other  defect  or  illegality,  including  the  failure  to  observe 
any  debt  limit  prescribed  by  law.  The  municipality  may  fund 
such  outstanding  indebtedness  by  issuing  bonds  as  herein  pro- 
vided. 

2966-2969,  inclusive  (obsolete). 

Sec.  2.  All  acts  and  parts  of  acts,  whether  general,  special, 
private  or  local,  regulating  or  relating  in  any  way  to  the  issuance 
of  bonds  or  other  obligations  of  a  municipality,  or  relating  to  the 
subject-matter  of  this  act,  are  hereby  repealed:  Provided,  ho'u>- 
ever,  that  this  act  shall  not  affect  any  local  or  private  act  enacted 
at  the  present  session  of  the  General  Assembly,  or  regular  session 
of  one  thousand  nine  hundred  and  twenty-one,  but  the  powers 
hereby  conferred  and  the  methods  of  procedure  hereby  provided 
shall  be  deemed  to  be  conferred  and  provided  in  addition  to  and 
not  in  substitution  for  those  conferred  or  provided  by  any  such 
local  or  private  act  enacted  at  the  present  session  of  the  General 
Assembly,  or  regular  session  of  one  thousand  nine  hundred  and 
twenty-one,  so  that  any  municipality  may,  at  its  option,  proceed 
under  any  such  local  or  private  act  applicable  to  it  enacted  at  the 
present  session  of  the  General  Assembly  or  regular  session  of  one 
thousand  nine  hundred  and  twenty-one  without  regard  to  the 
restrictions  imposed  by  this  act,  or  may  proceed  under  this  act 
without  regard  to  the  restrictions  imposed  by  any  other  act: 
Provided  further,  that  this  act  shall  not  affect  any  of  the  pro- 
visions of  article  nine  of  subchapter  one  of  chapter  fifty-six  of 
the    Consolidated    Statutes     (originally    chapter    fifty-six    of    the 


Tax  for  gen- 
eral purposes. 


Limit  of  rate. 


Proviso : 
Rate  in  larger 
cities. 


Certain  taxes 
validated. 


Outstanding 

debts 

validated. 


Power  to  fund 
debt. 


Repealing 
clause. 


Proviso: 
Local  and 
private  acts. 
Powers 
additional. 


Proviso:  Acts 

not  affected. 


214 


MUNICIPAL  BONDS 


Proviso : 
Action  here- 
tofore had. 


Proviso: 
Bonds  and 
notes  not 
invalidated. 


Specific  repeal. 


Printing  and 
distribution 
of  act. 


Public  Laws  of  one  thousand  nine  hundred  and  fifteen),  except 
those  provisions  which  prescribe  methods  of  procedure  for  bor- 
rowing money  or  issuing  bonds  or  other  obligations,  and  said 
article  shall  apply  to  all  municipalities  in  this  State,  notwith- 
standing any  inconsistent,  general,  special,  local  or  private  laws: 
Provided  further,  that  this  act  shall  not  affect  any  acts  or  pro- 
ceedings heretofore  done  or  taken  for  the  issuance  of  bonds  or 
other  obligations  under  the  Municipal  Finance  Act,  as  it  stood 
prior  to  the  ratification  of  this  act  or  under  any  other  act,  and 
every  municipality  is  hereby  authorized  to  complete  said  acts  and 
proceedings  pursuant  to  the  acts  under  which  they  were  done  or 
taken,  and  to  issue  said  bonds  or  other  obligations  under  such 
acts  in  the  same  manner  as  if  this  act  had  not  been  passed: 
Provided  further,  that  this  act  shall  not  render  invalid  any  bonds 
or  notes  or  proceedings  for  the  issuance  of  bonds  or  notes  in 
cases  where  such  bonds,  notes  or  proceedings  have  been  vali- 
dated by  any  other  act. 

Sec.  3.  The  whole  of  chapter  three  of  the  Public  Laws  of  one 
thousand  nine  hundred  and  twenty,  extra  session,  except  section 
six  thereof,  is  hereby  repealed. 

Sec.  4.  Immediately  upon  the  ratification  of  this  act,  the  Secre- 
tary of  State  shall  cause  to  be  printed  in  pamphlet  form  at  least 
one  thousand  five  hundred  copies  hereof,  and  to  cause  a  copy  of 
such  pamphlet  to  be  mailed  to  every  city  and  town  in  this  State. 

Sec.  5.  That  this  act  shall  be  in  full  force  from  and  after  its 
ratification. 

Ratified  this  the  20th  day  of  December,  A.D.  1921, 


Appendix  C 

DEFINITIONS  OF  TERMS  USED  IN  INVESTMENT 

BANKING 

Accrued  interest. 

The  interest  at  the  rate  borne  by  the  bond  from  the  date 
of  sale  to  the  next  coupon  or  Interest  payment  date,  or  from 
the  last  interest  or  coupon  date  to  date  of  settlement.  In 
making  computations  the  day  of  settlement  is  excluded. 

All  or  none. 

A  condition  imposed  by  the  bidder  for  an  issue  or  issues 
of  securities  by  which  all  the  bonds  he  bids  for  must  be 
awarded  to  him,  or  none  at  all. 

Amortization. 

The  payment  of  a  debt  by  means  of  annual  or  periodic 
contributions  to  a  sinking  fund.  In  the  case  of  bonds  pur- 
chased at  a  premium,  it  is  the  setting  aside  from  annual  inter- 
est such  an  amount  as  is  sufficient  to  make  good  the  premium 
at  the  maturity  of  the  bond. 

Annual  interest. 

Interest  payable  once  a  year,  which  is  not  considered  de- 
sirable. 

Assessed  valuation. 

The  valuation  placed  upon  property  for  the  purpose  of 
determining  the  amount  of  the  tax  paid  by  the  owner.  While 
most  statutes  require  that  property  shall  be  assessed  at  its 
full  or  true  value,  the  assessed  valuation  Is  rarely  the  actual 
cash  value.  The  term  Is  used  principally  in  connection  with 
the  assessed  valuation  of  real  estate. 

Authorized  issue. 

The  total  amount  of  bonds  which  may  be  sold  pursuant 
to  the  statute  or  ordinance  authorizing  them. 

215 


216  MUNICIPAL  BONDS 

Average  maturity. 

Example:  the  average  maturity  of  $20,000  bonds  matur- 
ing $1,000  each  year  for  twenty  years,  is  ten  years. 

Basis. 

The  average  annual  percentage  return  upon  the  money 
invested. 

Below  par. 

A  price  less  than  face  value. 

Bonded  debt. 

The  gross  bonded  debt  is  the  total  of  all  outstanding 
bonds  of  the  municipality.  The  net  bonded  debt  is  such  total 
less  sinking  funds  and  funds  on  hand  to  pay  maturing  bonds. 
In  computing  net  debt,  particular  attention  must  be  given  to  the 
purpose  for  which  such  computation  is  made  and  statutory 
provisions  strictly  construed. 

Callable. 

Subject  to  call  or  redemption  previous  to  the  date  of  ma- 
turity. If  a  bond  is  callable,  its  price  is  based  upon  the  term 
to  the  date  when  it  may  be  called  and  not  upon  the  term  to 
maturity.  Called  bonds  are  those  which  have  been  called  for 
redemption. 

Carry. 

A  bank  carries  a  broker's  bonds  when  it  makes  a  loan 
upon  the  bonds. 

Certified. 

Any  fact  which  has  been  vouched  for  in  writing.  Thus 
the  signatures  and  seal  appearing  upon  a  bond  may  be  certi- 
fied to  be  genuine  by  some  bank  or  trust  company.  A  legal 
paper  is  certified  by  the  municipal  clerk  to  be  a  true  and  cor- 
rect copy  of  the  original. 

Charter. 

The  municipal  charter  is  the  grant  of  power  to  the  munici- 
pality contained  in  the  statutes  enacted  by  the  State  legisla- 
ture. 

Coupons. 

Promissory  notes  attached  to  a  bond  and  forming  a  part 
of  the  instrument  until  detached,  promising  to  pay  a  definite 


APPENDIX  C  217 

amount  of  money  on  definite  dates.  The  amount  of  money 
promised  is  the  semi-annual  or  annual  interest  at  the  rate 
borne  by  the  bond.  A  detached  coupon  is  a  separate  and 
distinct  promise  to  pay. 

Coupon  bonds. 

Those  having  coupons  attached. 

Cremation  certificate. 

It  sometimes  happens  that  too  many  bonds  of  an  issue 
are  printed,  and  they  may  or  may  not  be  executed.  In  any 
event  the  surplus  should  be  destroyed  and  this  is  ordinarily 
accomplished  by  burning  them.  A  statement  signed  by  the 
persons  witnessing  the  destruction  of  them  is  made  and  filed 
with  a  designated  depository.  This  frequently  happens  in 
connection  with  New  Jersey  serial  bonds. 

Currency  bond. 

One  not  payable  in  gold  coin,  but  in  lawful  money. 

Date  of  bond. 

It  is  ordinarily  immaterial  whether  or  not  bonds  be  dated 
on  Sundays  or  holidays,  the  usual  opinion  to  the  contrary 
notwithstanding. 

Debenticre. 

A  bond  which  is  not  secured  by  a  mortgage. 

Definitive  bonds. 

The  preparation  of  bonds  is  sometimes  delayed,  and  in 
anticipation  of  their  issue,  temporary  receipts  are  given  to  the 
purchaser.  These  are  exchanged  for  the  definitive  bonds 
when  the  latter  are  ready  for  delivery. 

Denomination. 

The  face  value  of  a  bond,  ordinarily  $1,000.  Bonds  of 
$500  and  $100  denominations  are  sometimes  issued,  but  this 
practice  should  be  avoided. 

Depreciation. 

The  amount  charged  off  for  wear  and  tear,  obsolescence, 
and  reduction  in  value  of  property. 


218  MUNICIPAL  BONDS 

Direct  obligation. 

The  full  unlimited  and  unqualified  promise  of  the  obli- 
gator in  a  bond  or  note,  as  used  in  connection  with  municipal 
securities,  means  that  the  bond  is  supported  by  the  full  tax- 
ing power  of  the  municipality,  operating  upon  all  its  taxable 
property.  Distinguished  from  special  assessment  bonds  and 
those  issued  by  a  municipal  corporation  for  and  on  account 
of  a  tax  district. 

Discount. 

The  percentage  or  price  of  a  security  below  the  par  or 
face  value.  If  par  is  $100  and  the  bond  sells  at  $95,  the 
discount  is  5  per  cent,  or  $5. 

Drawn  bond. 

One  drawn  by  lot  for  payment  before  maturity. 

Escrow. 

Escrow  is  the  practice  of  depositing  papers  or  securities 
with  a  third  party  to  be  held  until  a  designated  event  takes 
place.  For  example,  a  municipality  may  deposit  its  bonds 
with  a  bank,  and  the  purchaser  may  pay  the  purchase  price  to 
the  same  bank,  the  transaction  to  be  consummated  when  proof 
in  stipulated  form  is  deposited  with  the  bank  that  no  litiga- 
tion exists  with  regard  to  the  issuance  of  the  securities  or  the 
purchase  of  property  for  which  the  bonds  are  issued. 

Ex-coupon. 

Without  interest.  Coupons  already  due  or  about  to  be- 
come due,  detached. 

Face  value. 

The  equivalent  of  par  because  par  does  not  always  include 
accrued  interest.  If  the  bond  is  for  $1000,  its  face  value 
is  the  same. 

Fiscal  agent. 

Banks  in  large  cities  or  par  points  are  sometimes  desig- 
nated by  municipal  corporations  as  fiscal  agents.  Such  desig- 
nations ordinarily  mean  only  that  the  interest  or  principal  ot 
bonds  will  be  paid  at  such  bank.  The  term  is  larger  than  its 
application. 


APPENDIX  C  219 

Fiscal  year. 

A  yearly  period,  regardless  of  the  calendar  year,  for 
which  books  are  kept,  or  in  the  case  of  municipalities,  for 
which  provision  for  expenses  is  made. 

Five-twenties. 

Bonds  due  in  twenty  years,  but  callable  after  five  years. 
(See  Callable.) 

Flat. 

Without  accrued  interest. 

Flowing  debt. 

Notes,  certificates,  or  short-term  bonds,  ordinarily  issued 
to  provide  funds  for  running  expenses,  or  in  anticipation  of 
the  issue  of  permanent  bonds.  Distinguished  from  bonded 
debt. 

Franchise. 

A  privilege  granted  by  governmental  authority,  such  as 
the  right  to  form  a  corporation,  or  to  place  tracks  in  a  street. 

Funded  debt. 

Bonded  debt  permanent  in  its  nature  as  distinguished  from 
a  temporary  floating  debt. 

Funding. 

The  operation  of  converting  floating  indebtedness  into 
funded  debt. 

Gold  bonds. 

Those  payable  in  United  States  gold  coin  of  the  present 
standard  of  weight  and  fineness.  If  a  bond  is  payable  in  gold, 
the  salesman  has  an  additional  talking  point,  but  a  promise 
to  pay  in  gold  has  no  other  value.  The  practice  of  making 
bonds  payable  in  gold  is  largely  abandoned. 

Income  basis  or  return. 
See  Net  return. 

Indorsed  bond. 

One  upon  which  something  has  been  written,  such  as  the 
owner's  name.  Such  a  bond  may  not  be  a  good  delivery,  that 
is,  the  intending  purchaser  is  not  obliged  to  accept  it.     Noth- 


220  MUNICIPAL  BONDS 

ing  should  be  written  upon  a  bond.  If  an  assignment  is  nec- 
essary and  no  provision  is  made  for  it  on  the  back  of  the 
bond,  write  the  assignment  on  a  separate  paper  and  attach  it 
to  the  bond. 

Installment  bonds. 
See  Serial  bonds. 

Interchangeable  bonds. 

A  coupon  bond  may  sometimes  be  surrendered  and  a  new 
Dond  issued  in  registered  form,  and  a  registered  bond  sur- 
rendered and  a  new  coupon  bond  issued  in  place  of  it.  This 
is  rare  in  the  case  of  municipals. 

Interest. 

The  price  of  money.  The  interest  on  a  $1,000  bond  at 
5  per  cent  is  $50  a  year,  which  is  the  price  the  borrower 
pays  for  the  use  of  the  money  for  one  year. 

Issue  price. 

The  price  at  which  an  issue  of  bonds  is  offered  to  the 
public. 

Joint  account. 

Two  or  more  persons,  investment  bankers  or  banks,  may 
buy  an  issue  of  securities.  This  is  sometimes  called  a  syndi- 
cate. The  partner  having  charge  of  the  transaction  is  called 
the  syndicate  manager. 

Judgment  bonds. 

Bonds  issued  to  fund  a  judgment. 

Lawful  money. 

This  is  money  which  the  government  declares  to  be  legal 
tender  in  payment  of  obligations.  Distinguished  from  gold 
coin. 

Legal  investments. 

Those  which  the  statutes  and  regulations  of  various  States 
prescribe  as  being  proper  investments  for  savings  banks  and 
trustees.     They  sell  at  a  better  price  than  bonds  not  "legal." 

Legal  Rate  of  Interest. 

A  fixed  maximum  interest  rate  established  by  statute. 


APPENDIX  C  221 

Lien. 

A  claim  against  property  which  the  creditor  may  have 
applied  to  the  satisfaction  of  a  debt.  A  mortgage  is  a  lien. 
A  municipal  bond  is  almost  never  a  lien  and  the  term  should 
not  be  used  in  describing  municipal  bonds. 

Market  value. 

The  price  which  a  security  will  probably  bring  If  sold. 
The  market  value  of  a  security  listed  on  the  New  York  Stock 
Exchange  is  easily  determinable.  The  market  value  of  mu- 
nicipal bonds  depends  upon  the  concensus  of  dealers'  opinions. 

Maturity. 

The  date  when  bonds  are  payable. 

Negotiable  instrument. 

An  obligation  which  may  be  transferred  free  from 
equitable  defenses  which  the  maker  may  have  against  the 
original  holder. 

Net  debt. 

See  bonded  debt. 

Net  price. 

The  lowest  price,  less  discounts  or  other  allowances. 

Net  return  on  investments. 

The  amount  of  return  to  the  investor,  taking  into  con- 
sideration interest  rate,  the  price  of  the  security,  whether 
above  or  below  par,  and  the  term  of  the  bond. 

Premium. 

The  price  of  a  security  In  excess  of  its  par  or  face  value. 
If  a  $1,000  bond  sells  for  $1,090,  the  premium  is  $90. 

Principal 

The  amount  promised  to  be  paid;  the  face  value  of  a 
bond. 

Quasi-municipal. 

A  term  applied  to  water  districts,  irrigation  districts  and 
road  districts. 


222  .  MUNICIPAL  BONDS 

Railroad-aid  bonds. 

Those  issued  by  municipalities  to  raise  funds  to  give  finan- 
cial assistance  to  a  railroad.  Fortunately  now  forbidden  to 
be  issued  in  most  States. 

Redeemable. 
See  Callable. 

Refunding. 

The  issuing  of  new  bonds  to  take  the  place  of  old  ones. 

Registered  bond. 

A  bond  payable  to  a  designated  payee.  Such  bonds  may 
be  registered  both  as  to  principal  and  interest,  or  registered 
as  to  principal  only.  Most  municipal  bonds  are  in  the  first 
instance  issued  as  coupon  bonds  with  the  privilege  of  registra- 
tion as  to  principal  only,  or  as  to  both  principal  and  interest. 
A  registered  bond  can  be  transferred  only  by  assignment  and 
does  not  pass  by  delivery  or  endorsement. 

Revenue  bond. 

One  issued  in  anticipation  of  current  taxes,  or  revenues. 

Sealed  bid. 

A  proposition  to  purchase  bonds  in  response  to  an  adver- 
tisement calling  for  such  tender,  is  usually  submitted  in  a  sealed 
envelope,  in  order  that  bidders  may  not  know  the  prices  their 
competitors  are  willing  to  offer.  Sealed  bids  are  opened  at 
one  time,  and  no  modification  of  such  a  bid  can  be  made,  after 
bids  are  opened. 

Semi-annual  interest. 

Interest  payable  twice  a  year — as  on  Ja.iuary  first  and 
July  first. 

Serial  bonds. 

An  issue  of  which  the  bonds  are  payable  in  installments. 
Thus  an  issue  of  $100,000  bonds  payable  $10,000  a  year 
for  ten  years,  is  an  issue  of  serial  bonds. 

Sinking  fund. 

This  is  a  fund  provided  by  contributions  made  at  stated 
intervals  to  provide  for  the  payment  of  the  principal  of  the 
debt. 


APPENDIX  C  223 

Special  assessment  bonds. 

A  bond  payable  from  assessments  and  for  which  the 
credit  of  the  issuing  municipality  may  not  be  pledged.  As  it 
is  a  bond  payable  from  a  special  fund,  it  may  not  be  a  nego- 
tiable instrument. 

State  bonds. 

Those  issued  by  one  of  the  States  of  the  Union. 

Syndicate. 

See  Joint  account. 

Temporary  certificates. 
See  Definitive  bonds. 

Ten-twenties. 

Bonds  due  in  twenty  years  but  subject  to  redemption  at  or 
after  ten  years. 

fV  arrant. 

Municipal  paper  which  is  usually  an  order  upon  the  treas- 
urer for  the  payment  of  money. 

When  and  as  issued. 

Sales  of  securities  are  sometimes  made  prior  to  the  actual 
issue  "when,  as  and  if  issued,"  to  protect  the  seller  from 
liability  in  case  the  securities  are  never  issued. 

Bibliography 

Chamberlain,  Lawrence:  The  Principles  of  Bond  Investment. 

Dillon:  Law  of  Municipal  Corporations. 

Jordan,   David  L. :  Investments. 

Raymond,  William  L. :  American   and  Foreign  Investment  Bonds. 

Rollins,  Montgomery:  Municipal  and  Corporation  Bonds. 

An  extremely  valuable  compilation  of  articles  on  investment  securities  is 
contained  in  The  Amials  of  the  American  Academy  of  Political  and  Social 
Science,  for  March,   1920,  in  which  the  following  articles  appear: 

Arens,  Herman  F. :  Causes  Affecting  the  Value  of  Bonds. 
Lyons,  Hastings:  Classification  of  Investment  Bonds. 
Osgood,  Roy  C. :  The  Effect  of  Taxation  on  Securities. 
Rollins,  Montgomery:  Tables  of  Bond  Values — Theory  and  Use. 


INDEX 


Acceptable  denomination,  108 
Acceptable  duration,  108 
Account,  joint,  220 
Accrued  interest,  215 
Act,  Gardner,  39,  40 

Concerning  Municipalities,  N.  J.,  28 
Acquisition   of   property,   27 

limitations  on,  27,  28 

methods  of,  27 
Activities,   municipal,   27-31 

acquisition  of  property,  27 

building  houses,  31 

public  improvements,  28 

public  utilities,  30 

sale  of  commodities,  31 
Advertisement,   bond    prices   20   years 
ago,   139 

$31,800,000  New  York  State  bonds, 
144 
Agent,  fiscal,  218 
Agreement,  deposit,  89,  90 
All  or  none,  defined,  215 
Amortization,  215 
Annual  interest,  215 
Appreciation,  potential,  108,  109 
Area,  limitation  of,  70,  71 
Assessed  valuation,  132,  133,  215 
Assessment  bonds,  69 

not  negotiable  instruments,  70 
Atkinson,  Raymond  C,  39 
Attorneys'  functions,   161-179 
Authorized  issue,  215 
Average  maturity,  216 
Award  and  sale,  85-95 

B 

Bad  faith,  99,  100 

Bargain    and    sale,    actual    operation 

one  of,  85 
Basis,  216 

Below  par,  defined,  216 
Bibliography,  223 
Bid,  sealed,  222 

Bona  fide  purchaser  has  good  title,  10 
Bond, 

classification,  155 


Bond, 

classification  according  to  means  of 

payment,   159 

classification    according   to   tax   dis- 
tricts, 157 

classification    according    to    time    of 
payment,  7Z 

date  of,  217 

issue,  ordinance  authorizing,  4 

issue,  origin  of,  2,  3 

maturity  of,  73-84 

narrative  of,  11 

values,   tables  of,    129 
Bonds, 

assessment,  69,  70 

callable,  72) 

city,  155 

classified,  155 

county,  62,  155,  156 

coupon,  217 

currenc>%  217 

definitive,  217 

different  forms  of,  10,  11 

drawn,  218 

electoral,  159,  160 

Federal,  62 

gold,  219 

indorsed,  219 

installment,  77,  220 

interchangeable,  220 

as  investments,  105-117 

judgment,  220 

minor  municipalities,  156 

necessary      public      purposes,      157, 
158 

not  equally  valuable,  131 

not  liens,  101 

particular,   155-160 

properties    and    improvements,    158, 
159 

railroad-aid,  222 

serial,  77,  222 

special  assessment,  223 

State,  223 

tax  districts,  156,  157 

term,  and  term  of,  72,  7Z 
Bond  Buyer,  180,  181 
Bonded  debt,  216 


225 


226 


MUNICIPAL  BONDS 


Bondholder, 

contracts  with,  102-104 

protected  by   U.   S.   Supreme   Court, 
162,  163 

remedy  of,  in  face  of  default,  96-104 
Borrowing,  municipal,  42 
Brokerage  and  commissions,  90,  91 
Building  houses,  31 


Camden,  School  Bond  Ordinance,  7,  8 
Callable,  defined,  216 
Capital  expenditures,  26 
Carry,  defined,  216 
Certificate,  cremation,  217 
Certification    of    signatures    and    seal, 

153,  154 
Certified,  defined,  216 
Charter  defined,  216 
City  bonds,  155 
Classification   of  bonds,   155 

according  to  means  of  payment,  159 

according  to  tax  districts,  157 

according  to  time  of  payment,  73 
Classification    of    municipal    corpora- 
tions, 22 
Clifton,  N.  J.,  Annual  Report  of  Sink- 
ing Fund  Commission,  81-84 

budget,  6,  7 

tax  ordinance,  5,  6 
Coast  Banker,  181 
Commercial  and  Financial  Chronicle, 

138,  181 
Commercial  West,  181 
Commissions  and  brokerage,  90,  91 
Commodities,  sale  of  as  city  right,  31 
Compulsory  payment,  61,  62 
Conditions  of  negotiability,  9,  10 
Constitutional    debt    limits,    45-49 

exceptions,  45-48 

illustrations  of,  46 
Constitutional   limitations  on  taxation, 

68,  69 
Contingent  debt,  63 
Contracts, 

with  bondholder,  102-104 

fiscal  agency,  89 
Counsel, 

employment  of,  184 

must    have    record    of    proceedings, 
165 

when    retained    by    purchaser,    164, 
165 
County  bonds,  155,  156 

versus  municipal,  62,  63    . 


Coupon  bond,  10,  11,  216,  217 

New  Jersey,  registerable  as  to  prin- 
cipal only,  or  as  to  both  princi- 
pal and  interest,  13-15 
New   York,    registerable   only    as   to 
both   principal    and   interest,   15, 
16 
versus  registered  bond,  11,  12 
Creation  of  municipalities,  20 
Credit,  factor  in  valuation,  134,  135 
Cremation  certificate,  217 
Currency  bond,  217 

D 

Date  of  bond,  217 
Debenture,  217 
Debt, 

bonded,  216 

contingent,  63 

funded,  219 
Debt  limit,  66,  67 

constitutional,  45-49 

contained  in  Pierson  Act,  48,  49 

exceptions,  45-48 

illustrations  of,  46 
Debt,   net,  221 

reduction,  table  showing,  84 

service,  26,  27,  37 
Debt  statements, 

annual.  New  Jersey  city,  56,  57 

forms  of,  54-60 

New  York  second  class  city,  54,  55 

New  York  third  class  city,  55,  56 

summary.  New  Jersey  city,  60 

supplemental.    New   Jersey   city,   59, 
60 
Default, 

former  cases  of,  96,  97 

reasons  for,  97-99 

and  remedy  of  bondholders,  96-104 
Deferred  serial  plan,  78,  79 
Definitions,   terms   used   in   investment 

banking,  215-223 
Definitive  bonds,  217 
Denomination,  217 

acceptable,  108 
Deposit  agreement,  89,  90 
Depreciation,  217 

Determination  of  time  of  payment,  7Z 
Development   of   cities,    historical,   24, 

25 
Dillon's  estoppel,  clause,  12,   13 

views  on  borrowing,  43,  44 
Direct  obligation,  218 
Discount,  218 


INDEX 


227 


Dollar,  purchasing  power  of,  130 
Drawn  bond,  218 
Duration,  acceptable,  108 


Early     importance      of     municipality, 

1,  2 
Economist,  181 
Education  Law,   149 
Electoral  bonds,   159,   160 
Escrow,  defined,  218 
Estoppel,    146,   147 

Dillon's  clause,  12,  13 
Evaluation  of  bonds,   137 
Excise  taxes,  36 
Ex-coupon,  218 
Exemption, 

tax,  107 

from  care,   107,   108 
Expenditures, 

capital,  26 

debt  service,  26,  27 

municipal,  25,  26 

running,  26 
Expense  of  issuing  bonds,  90 


Face  value,  218 

Federal  bonds  versus  municipal,  62 

Federal  tort  theory,  70 

Fair  income  return,  107 

Fiduciaries,  investments  by,  109,  110 

Fiscal, 

agency  contracts,  89 

agent,  218 

year,  219 
"Five-twenties,"  219 
Flat,  219 

Floating  debt,  219 
Forgery,  possibility  of,  182 
Forms, 

of  bonds,  10,  11 

of  coupon  and  registerable  bonds, 
13-17;  (see  also,  specimen  fac- 
ing page  1) 

of   municipal    ordinances    and    bud- 
gets, 5-8 
Franchise,  219 

Fraud,  how  avoided,  182,  183 
Fund,  sinking,  74-84,  223 
Funded  debt,  219 
Funding,  219 


Gardner  Act,  39,  40 
General  Municipal  Law,  149 
General  rights  of  municipalities,  29 
Glossary,  215-223 
Gold  bonds,  219 

Good   title,   bona    fide   purchaser   pos- 
sesses,  10 

H 

Honesty,    improvement   in   civic   sense 

of,  145 
Houses,  building,  31 


Improvements, 

and  properties,  bonds  for,   158,   159 

public,  28 
Income, 

fair  return,  107 

stability  of,  106,  107 

taxes,  36,  37 

tax    versus    personal    property    tax, 
118,  119 
Income  basis  or  return,  219 
Incontestability    and    validation,    145- 

154 
Incurred   indebtedness,   limitations   on, 

44 
Indebtedness,   133 
Index     of     municipal     bond     market, 

1900-1922,  40 
Indorsed  bond,  defined,  219 
Information,  sources,   137 
Inheritance  taxes,  124,  125 
Installment  bonds,  220 
Installments,  equal  annual,  77,  78 
Interchangeable  bonds,  220 
Interest,  128,  220 

accrued,  215 

annual,   215 

legal  rate  of,  220 

semi-annual,  222 
Invalidity  of   municipal   bonds,   10,   11 
Investment, 

bonds  as  ideal,  105-117 

definition  of,  105 

by  fiduciaries,   109,   110 

legal,  220 

net  return  on,  221 

for  savings  banks,  109,  110,  112-116 
Issue,  authorized,  215 

price,  220 

purpose  of,  71,  72 


228 


MUNICIPAL  BONDS 


Joint  account,  220 
Judgment  bonds,  220 
Judicial    valuation,    in    Georgia,    150, 
151 
sustained,  151,  152 


Law, 

application    to   municipal    financing, 
161,  162 

defined,   161 
Lawful  money,  220 
Legal  investments,  220 

for  savings  banks,  109,  110,  112-116 
Legal  side,  progress  on,  145,  146 
Legal  rate  of  interest,  220 
Legality,  independent  of  power  to  pay, 
69 

questions  of,  162-164 
Legislation,   imperfection   of  all,   146 
Legislative  ratification,  53 
Legislative  relief,  104 
Lien,  221 

Limit,  debt,  66-67 
Limitations, 

of  area,  70-71 

constitutional,    on    taxation,   68,   69 

short  statutes  of,  147 

on  taxation,  67,  68 
Limited  tax  rate,  effect  of,  102 
Loans,  short-term,  53,  73 
Loeffler,  H.  G.,  40 

M 

Manufacturers  Record,  181 
Market  conditions,  130,  131 
Market  value,  221 

of  State  and  municipal  bonds  com- 
pared, 135-137 
Marketability  of  bonds,  107 
Maturity,  of  bond,  73-84,  221 

average,  216 
Means   of   payment,   classification    by, 

159 
Memorandum  for  examination  of  mu- 
nicipal bonds,   174-179 
Minor  municipalities,  bonds  of,  156 
Money, 

a  commodity,  128 

lawful,  220 
Municipal  bond,  9 

invalidity  of,  10 

origin  of,  1 


Municipal  bond, 

redemption  of,  32 

security  of,  13 

term  of,  72 
Municipal, 

borrowing,    42 ;     Dillon's    views    of 
borrowing,  43,  44 

corporations,   powers    and   functions 
of,  21 ;   classification  of,  22 

expenditures,  25,  26 

Finance  Act  of  North  Carolina,  re- 
print, 197-214 

property  and  improvements,  24-31 

ordinances  and  budgets,  5 
Municipalities, 

activities  and  functions  of,  27-31 

creation  of,  20 

early  importance  of,  1,  2 

general  rights  of,  29 

legislative  control  of,  18-20 

quasi,  63,  64 

true,  63 

N 

Narrative  of  bond,  11 
Negotiability,  conditions  of,  9,  10 
Negotiable  instrument,  221 

power  to  issue,  49-53 
Net, 

debt,  221 
price,  221 

return  on  investments,  221 
yield,  129 
New    Jersey    coupon    bond,    register- 
able  as  to  principal  only,  or  as 
to   both    principal    and   interest, 
13-15 
New   York   coupon   bond,   registerable 
only    as   to   both   principal    and 
interest,  15,   16 
New  York  registered  bond,  17 
Nominal  yield,  128 
North     Carolina     Municipal     Finance 

Act,  reprint,  197-214 
Notice   of  bond   issue,   publication   of, 

4,5 
Notice  of  sale,  New  York  Union  Free 
School  District  Bonds,  92,  93 
bonds  of  New  Jersey  city,  93,  94 


OfiFerings,  public, 

for  week  ended   Dec.   16,   1921,   141 
for  week   ended   Dec.  30,   1921,   142 

One   Per   Cent  Law,   Smith,   39 


INDEX 


229 


Opinion, 

final,  165,  167 

as  to  legality,  165 

preliminary,  165 

qualified,  167 

when  merchantable,  168 
Ordinance  authorizing  bond  issue,  4 
Origin, 

of  bond  issue  is  public  necessity,  2,  3 

of  municipal  bond   is  a  statute,  1 
Outline  analysis  of  subject,  187-195 


Pacific  Banker,  182 
Par,  below,  216 
Particular  bonds,  155-160 
Payment,  compulsory,  61,  62 
means  of,  159 
promptness  in,  189 
Personal   property  versus  income  tax, 

118,  119 
Pierson  Act,  debt  limits  in,  48,  49 
Place  of  payment  should  be  New  York 

or  par  point,  183,   184 
Poll  taxes,  35,  36 

Population,  factor  in  valuation,  134 
Portage  la  Prairie,  100 
Postal   savings   deposits,   legal   securi- 
ties for,  110,  HI 
Potential   appreciation,   108,  109 
Power  to  issue  bonds,  162 
Power  to  issue  negotiable  instruments, 
49,  50 
granted  by  County  Law,  50 
granted  by  General  Municipal  Act, 

51,  52 
granted  by  Pierson  Act  of  New  Jer- 
sey, 52 
granted   by  Municipal    Finance  Act 
of  North  Carolina,  53 
Power  to  pay,  legality  independent  of, 

69 
Practical  suggestions,  180-184 
Preliminary  steps  in  issuing  bonds,  3 
Premium,  221 
Preparation  of  bonds,  182 
Price,  issue,  220 

net,  221 
Prices  and  yields,  20  years  ago,   139 
week  ended  Dec.  16,  1921,  141 
week  ended  Dec.  30,  1921,  142 
Principal,  221 

security  of,  106 
Printing  of  bonds,  4 
Prior  redemption,  notice  of,  74 


Private  sale,  85 

Problem  of  municipal  bond  stated,  1 
Procedure,  questions  of,   162 
Promise  and  purpose  of  bond,  66-72 
Promissor  in  bond,  61-65 
Property,  acquisition  of,  27 

and   improvements,   bonds   for,    158, 
159 

taxes,  36 
Proposal,    form    of,    for    New    York 
Union      Free      School      District 
bonds,  93 

for  bonds  of  New  Jersey  city,  95 
Protection  of  bondholder  by  U.  S.  Su- 
preme Court,   162,  163 
Publication  of  notice,  4,  5 
Publicity,  180 
Public  purposes,   bonds   for   necessary 

157,  158 
Public  sale,  85,  86 

disadvantages   of,  86 

illustrations  and  notices  of,  91-95 

New  Jersey  plan  concerning,  87,  88 

New  York  statute  governing,  86,  87 

public  notice  of,  86 
Public  utilities,  30 
Purchaser,    bona   fide    has   good   title, 

10 
Purchasing  power  of  dollar,  130 
Purpose  of  issue,  71,  72 

classification  according  to,  157 
Purpose  and  promise  of  bond,  66-72 

Q 

Quasi-municipal  corporations,  22,  23 

classified,    22 

defined,  221 
Quasi  municipalities,  63,  64 

R 

Railroad-aid  bonds,  defined,  222 
Rates,  tax,  133,  134 
Ratification,  legislative,  53 
Receivers  cannot  be  appointed,  103 
Record    memorandum,    form    of,    169- 

173 
Redeemable,  222 
Redemption  of  municipal  bonds,  32 

prior,  74 
Refunding,  53,  222 
Registered  bond, 

defined,  222 

New  York,  17 

versus  coupon,  11,  12 


230 


MUNICIPAL  BONDS 


Registration  of  bonds,  10,  11 
with  public  official,   152,   153 

Relief,  legislative,  104 

Remedy  of  bondholders,  96-104 

Revenue,  41 
bond,  defined,  222 

Rules  of  the  game,  180 

Running  expenditures,  26 


Sale, 

and  award,  85-95 

of  commodities,  31 

illustrations  of  notice  of  public,  91- 

95 
importance  of  plan  of,  91 
of  New  York  City  bonds,  results  of, 

142,  143 
par,  88 
private,  85 
procedure  of,  5 
public,  85-86 
Saturation   point,   134 
Savings  banks,   legal   investments  for, 

109,  110,  112-116 
School  Bond  Ordinance,  Camden,  N.  J., 

7,  8 
Sealed  bids,  222 

Seal  and  signatures  certified,  153,  154 
Second   Class  Cities  Law,  New  York, 

28,  29 
Security,  of  municipal  bond,  13 

of  principal,   106 
Semi-annual  interest,  222 
Serial  bonds,  77,  222 

advantages  of,  78 
Serial  plan,  deferred,  78,  79 
Serial    and   sinking  fund   plans,   com- 
parative cost,  81 
Short-term  loans,  S3,  73 
Side  agreements,   183 
Signatures  and  seal  certified,  153,  154 
Sinking  fund,  74,  75,  222 
advantages  of,  76,  77 
annual  contributions  to,  75,  76 
Commission,    Clifton,   N.   J.,   annual 

report  of,  81-84 
clause   or  contract,   example   of,   79, 

80 
misuse  of,  76 
requirements   for   each  $1,000  bond, 

80,  81 
and   serial   plans,   comparative  cost, 
81 
Sixteenth  amendment  to  Federal  Con- 
stitution, effect  of,  122 


Smith  One  Per  Cent  Law,  39 
Sources  of  information,  137,  138 
Special  assessment  bonds,  223 
Stability  of  income,   106,  107 
State  bonds,  223 

versus  municipal,  62 

versus  municipal,  values,  135-137 
Statutory  powers, 

Act    Concerning    Municipalities    in 
N.  J.,  28 

Second   Class  Cities  Law  in  N,  Y., 
28,  29 
Suggestions,  practical,   180-184 
Syndicate,  223 


Taxation, 

of  bonds,  118-127 

of  bonds  of  non-residents,  124 

of  income  from  State  and  municipal 

bonds,  121-124 
of  principal  of  State  and  municipal 

bonds,   121 
clause     provides     for     payment     of 

principal  and  interest,  37 
definition  of,  32 
delegation  of  power  of,  34 
and  limitation  of  taxes,  32-41 
limitations,  67,  68 
personal     property     versus     income, 

118 
power  of,  32,  34 
provisions  important  to  bondholder, 

38,  39 
public  purpose  boundary  of,  34,  35 
test  of  right  of,  35 
Tax, 

districts,   bonds  of,    156,   157 

exemption,   107 

-free  versus  taxable  bonds,  126,  127 

limit,  argument  against,  40 

limits    on     debt    service,     argument 

against,  41 
rates,  102,  133,  134 
ordinance,  Clifton,  N.  J.,  5,  6 
Taxes, 

classification,  35 
debt  service,  37 
excise,  36 
income,  36,  37 
inheritance,  124,  125 
poll,  35,  36 
property,  36 

purposes   for  which   levied,    120 
Taxing   power,    definition,    119 
Federal,  limitations  on,  119,  120 


INDEX 


231 


Taxing  power, 

State,  120 

State,  limitations  on,  120 

United  States,  119 
Temporary  certificates,  223 
"Ten-twenties,"  223 
Term  bonds,  7i 
Term  of  bonds,  72 

related  to  life  of  improvement,  79 
Terms  used  in  investment  banking  de- 
fined, 215-223 
Time  of  payment,  determination  of,  7i 
Title,   purchaser   has  good   bona   fide, 

10 
Tort  theory,  Federal,  70 
'I'rue  municipalities,  63 


U 


United  States  Mortgage  &  Trust  Co., 

182 


Validation, 
by  decree,  148,  149 
and  incontestability,  115 
judicial  in  Georgia,   150,  151 
sustained,   151,   152 


Valuation,  assessed,  132,  133,  215 

of  bonds,  128-144 
Value, 

differences    in,    as   between    munici- 
palities,   131,    132 
face,  218 
market,  221 
Values,  State  versus  municipal  bonds, 
135-137 

W 

Wall  Street  Journal,  181 
Warrant,  223 

When  and  as  issued,  defined,  223 
Wholesale    prices    in    U.    S.    for    110 
years,  143 


Year,  fiscal,  219 
Yield, 

net,   129 

nominal,  128 
Yields     and     prices,    20    years     ago, 
139 

week  ended  Dec.  16,  1921,  141 

week  ended  Dec.  30,  1921,  142 


MA 
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UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


FP'  1982. 


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AA    000  977  890    3 


